Bank of England Preview

March 9, 2011

This week’s policy decision is a difficult read.  Since splitting 6-3 in February, with six monetary policy committee members voting for no change, two wanting a Bank Rate hike of 25 basis points and one recommending an increase of 50 basis points, new information has emerged that could shake up opinion further.  We know from the February minutes that the six-person majority had members who were tilting more closely than earlier toward recommending a tightening of policy because inflation is looking more entrenched well above target in 2011 and because of evidence that expected inflation is creeping upward. 

But the majority was also worried about the economy’s contraction last quarter, which subsequently got revised upward to from 0.5% not annualized to 0.6%.  Those members would like assurance that Britain isn’t relapsing into recession.  The composition of growth in 4Q10 was worrisome.  Personal consumption fell for the first time in six quarters, and a 2.5% non-annualized slump in business investment was the biggest drop since 2Q09.  Net exports subtracted 0.3 percentage points from the overall growth rate of GDP, and the only source of strength, a 0.7% rise in government spending, is now being slammed.  Service-sector GDP fell 0.7% on the quarter, also the most in six quarters.  Same-store retail sales in February were 0.4% lower than a year earlier.  Although purchasing manager readings in February of 61.5 in manufacturing (tied with January’s data series high), 56.5 in construction (an 8-month high) and 52.6 in services suggest first-quarter 2011 growth of 0.5%, the committee’s majority may be more comfortable with waiting for the actual release of first-quarter GDP to be sure that the economy can tolerate a rate increase.

From an inflation standpoint, however, the time to hesitate is through.  In spite of subdued wages, CPI inflation in the latest report showed a further acceleration of 0.3 percentage points to 2.0%, twice the Bank of England’s target, and data on February shop prices released today revealed the biggest monthly advance in two years and the highest on-year pace in 27 months.  Strong pressure from rising oil prices persists.  Since the February meeting, sterling has lost 1.6% against the euro, while firming 0.9% against the dollar.  The Bank of England’s quarterly inflation report revised upward the near-term inflation path even though projected GDP was revised downward. 

On the Bank of England policy committee, unlike the FOMC and ECB Governing Council where decision-making by consensus is favored, policymakers are encouraged to vote independently, and they play by majority rules.  That approach promotes unpredictability.  Some votes will be decided late and get influenced by the persuasiveness of how the merits of tightening or not are argued.  I see this as a very close call.  If I had a vote, it would be to tighten.  Inflation has exceeded the central bank’s target ceiling since the beginning of last year, has not fallen as soon as they predicted, and not acting against inflation now risks damage to credibility as an inflation fighter.  More damage can be done if they do not raise rates but should have done so than if they tighten in circumstances where not changing policy would have been the correct call.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



2 Responses to “Bank of England Preview”

  1. […] It wasn’t to be either then or today.  British industrial production rose 0.5% in January and by 1.2% in November-January from the previous three-month period.  Manufacturing output advanced 1.0% in January and was 6.8% greater than a year earlier.  For the latest three months, factory output exceeded the year-earlier level by 5.5%.  For further background on this meeting, see my earlier preview. […]

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