Bank of England Unlikely to Modify Policy Thursday

April 6, 2011

The Bank of England policy announcement this month will be made at 11:00 GMT tomorrow.

The February and March meetings of the Monetary Policy Committee produced identical votes.  Regarding the 0.5% Base Rate, its level since March 2009, two of nine (Weale and Dale) recommended a 25-basis point increase, one (Sentance) sought a hike of 50 basis points, and the remaining six-person majority carried the day with a vote for no change.  Regarding the asset purchase program, which last was raised in November 2009 to GBP 200 billion, eight MPC members voted for keeping that level, and one dissent was again cast by Adam Posen to raise such to GBP 250 billion.

Paragraph 31 of the March minutes contains key language expressing the majority’s preference to give the data more time to clarify whether a rate increase is required or more damaging than beneficial.  As in earlier months, the majority is far from monolithic in its thinking, and the center of gravity has been shifting closer to a vote to tighten.  However, four weeks since the last meeting does not seem ample time to satisfy the wish for delay.  Paragraph 31 reads:

31 Other members concluded that an increase in Bank Rate was not yet appropriate. While the recent information on the prospects for UK net trade had been encouraging, it was not yet clear that the weakness in output growth seen in the latter part of 2010 would prove temporary, particularly in light of the latest indicators of a further weakening in consumer spending. There remained differences of view between these members on the likelihood of the upside risk associated with an increase in inflation expectations materializing. Some thought that this risk remained limited, given that the near-term outlook for inflation could be explained by reference to changes in energy and other commodity prices, VAT and the sterling exchange rate. Others thought that this risk had risen, given further upwards revisions to the near-term outlook for inflation, and that the case for an increase in Bank Rate had strengthened in recent months. Overall, the uncertainty created by both developments in the oil market and the recent indicators of household spending and confidence meant that there remained merit in waiting to see how those factors evolved before altering the stance of monetary policy. The Committee would learn more over coming months about the effect of the recent increase in the standard rate of VAT and, therefore, also about the forces affecting inflation.

British monetary officials are apt to be as confused now as they were four weeks ago.  There was lots of bad news.  Industrial production plunged 1.2% in February, and factory output was unchanged.  Retail sales volume in the same month dropped 0.8% and was merely 1.3% higher than a year earlier.  The Conservative-led government presented a budget that reduced projected GDP growth this year to 1.7% and, as a result of a weaker path for demand and income, predicted a somewhat higher trajectory for public-sector borrowing than had been indicated earlier.  Consumer confidence remains poor at minus 28.  According to an estimate by the National Institute of Economic and Social Research, GDP for the three months to March, that is the first quarter of 2011, rose 0.7% following a 0.5% drop in 4Q10.  The volatility was caused by foul weather at the end of 2010, but the underlying growth rate over the six months embodied by the two sequential quarters was a mere 0.1%.  The manufacturing PMI fell 4.1 points in March to 57.1.  That’s stall speed in the face of fiscal restraint, elevated commodity prices, and the possibility of a slowdown in key continental European markets and Japan.

Bearish news has been balanced by several better-than-expected indicators released recently.  The services-PMI jumped to 57.1 last month from 52.8 in February and a fourth-quarter average level of 52.0.  Britain’s construction PMI remained steady and high at 56.4 in March versus 50.8 on average in 4Q10.  Unemployment slid 10.2K in January.  The CBI’s industrial trends index improved to +5 in March from negative eight in February and minus 16 in January, and the CBI survey of retailers produced a 9-point improvement to +15 in March.  The goods and services trade deficit of GBP 2.95 billion in January was the smallest shortfall since February 2010.  And inflation remains very problematic vis-a-vis a medium target of 2.5%.  The CPI rose 0.7% in February and accelerated to a 12-month increase of 4.4%.  Core inflation rose to 3.4%.

It’s easy to understand why some policymakers have been chomping at the bit to start raising British short-term rates.  But a rate increase now would seem inconsistent with the majority’s wish for greater clarity and consistency in the data it examines.  Even sterling has gone in two directions, rising against the dollar since the March meeting but falling relative to the euro.

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



Comments are closed.