Bank of England Holds Its Fire in a Somewhat Surprising Move

November 4, 2010

The Bank of England did not raise the GBP 200 billion size of its asset purchase program.  This is something which Monetary Policy Committee member  Adam Posen had sought at the October meeting, when a three-way 7-1-1 split resulted.  At the same meeting, Andrew Sentance dissented in favor of a rate hike to 0.75% from 0.50%.  The Base Rate has been 0.5% since March 2009.  The last increase of quantitative easing was made in November 2009, and the limit of securities to be purchased through that program was reached in January of this year.  The Bank of England released a strict boiler plate statement of the decisions taken today and advising the public that further information regarding considerations that went into the decision can be learned from the quarterly inflation report due November 10 and minutes of today’s meeting, which will be published on November 17.

British GDP in the third quarter expanded at a 2.8% annualized pace relative to 2Q, which exceeded expectations.  GDP was also 3.2% higher than a year earlier, while CPI inflation of 3.1% has stubbornly stayed at or above 3.0% all year and now faces the shock of a 2.5-percentage point VAT hike this January.  Both the manufacturing and services purchasing manager surveys showed faster rates of expansion in October than September.

The Bank of England’s action isolates the Fed as the most aggressively accommodative central bank at the moment just as Britain has been cast into the role of running the tightest fiscal policy among major economies.  This configuration points to further dollar deprecation including, and some might think especially, against sterling.  The more the Fed reflates, the more emerging markets will feel compelled to adopt stricter capital controls to prevent a flood of excessive inflows of hot money.  Such inflows produce excessive money and credit growth that can fuel higher inflation.  Asian leaders in the 1990s also learned that hot money inflows are susceptible to reversing just as quickly when the Fed eventually restores more normal interest rate settings. 

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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