No Policy Change Likely at the Bank of England

December 8, 2010

The Monetary Policy Committee is holding its last policy session of 2010, a year in which no changes are likely to have been made.  The Bank Rate has been at 0.5% since a cut in March 2009.  The last extension of quantitative easing, a rise of GBP 25 billion to a GBP 200 billion ceiling, was announced in November 2009 and completed last January.  Decisions not to change either of those two policy instruments carried by votes of 8-1 in each case at the October and November meetings.  But the peculiar thing about those votes is that the dissent on the rate preferred a tightening to 0.75%, whereas the objection on the asset purchase plan limit wanted an easing via a higher limit of GBP 250 billion.  The eight-person majority will be even less inclined to modify the current stance this month.

The arguments against tightening are

  • The latest M4 money data showed a 12-month record decline of 0.7%.
  • Mortgage approvals have been trending lower, and housing prices have exhibited renewed weakness.
  • No G7 economy faces stiffer fiscal restraint in 2011 than Great Britain.
  • Last month’s quarterly Inflation Report by the central bank did not exclude the risk that more quantitative easing might be needed down the road.

A further extension of the asset purchase program at this juncture is very remote, however.  For one thing, manufacturing has been surprisingly buoyant, with a 2.6-point jump in the factory purchasing managers index to 58.0 last month and a 12-point increase in the CBI’s industrial trends index to minus 12 this month, which benefited from greatly improved export orders.  For another, the rise of 0.5% on month in October retail sales was the best gain in three months.  The service-sector PMI reading of 53.0 last month showed decent positive growth.  A third reason not to tighten is that consumer prices went up another 0.3% on month in October, lifting the 12-month increase to a four-month high of 3.2%.  Wages remain subdued by the claimant count for unemployment decreased in the latest report.  The aforementioned November Inflation Report expressed more concern than seen earlier about the likelihood of inflation rising further in the near term and staying elevated in 2011.  Bank of England Governor King would probably hope to stay out of the limelight for a while, since a WikiLeaks revelation involving him in a somewhat political capacity has raised some questions about the independence of the Bank of England.  Finally, there is the recent reaction to the Federal Reserve’s decision to do another round of quantitative easing.  Long-term U.S. interest rates have risen sharply, just the opposite result from what officials sought, and that has exerted upward pressure on other sovereign bond yields. 

The Bank of England’s announcement will be made on its web site Thursday at 12:00 GMT.  The pound was trading about 2% higher than its current value against the dollar at 1.6130 when the November decision was announced.

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



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