Bank of England Preview: No Changes Expected

May 4, 2011

The Bank of England will announce monetary policy decisions at 11:00 GMT on Thursday following this month’s two-day meeting.  Only in the remote chance of modified policy parameters, which I do not expect to happen, will the broadcast statement include more than the basics, namely the Bank Rate level, the ceiling on the asset purchase program, when those policies were last changed, and the release dates and times for minutes of the meeting and the May quarterly Inflation Outlook report.  By another 6-3 vote, policymakers in April kept the Bank Rate at 0.5%, its level since March 2009, and by another 8-1 vote they left the asset purchase ceiling of GBP 200 billion since November 2009 unchanged. 

The British economy is only treading water and doing more poorly than monetary officials had assumed.  GDP fell 0.5% in the final quarter of 2010 and merely reversed those losses last quarter.  The manufacturing purchasing managers index fell to 54.6 in April from 56.7 in March and an average score of 61.4 in January-February.  The construction sector PMI index was at 53.3 in April, down from 56.4 in March and 56.5 in February.  Consumer confidence slid deeper below zero in April, plumbing to minus 31 according to the GFK measure from minus 28 in March.  Unemployment in March posted an unexpected rise in March.  The CBI’s industrial trends index weakened to minus 11 in April from +5 in March.  Retail sales are just 1.3% higher than a year ago.

Minutes of recent meetings of the Monetary Policy Committee reveal a majority, which while not unanimous, very leery about the economy’s ability to withstand the drag of fiscal restraint and higher energy prices and believing that above target inflation will settle back on its own amid considerable underutilization of Britain’s productive resources. 

When everyone else’s price data were subdued, the U.K. experienced acceleration.  With inflation rising in many countries now, evidence finally has surfaced that British price strains may be lessening.  CPI inflation slowed to 4.0% in March from 4.4% in February.  The Nationwide index of home prices were 1.3% lower in April than a year earlier, the biggest on-year drop since August 2009, and also down 0.2% on month.  Wage earnings in the three months to February were 2.2% higher than a year before.  Unit labor costs went up just 0.7% between the final quarters of 2009 and 2010.  Producer output prices are 5.4% higher than a year ago, but the core index is up just 3.0%.

Two worrisome development for policy hawks are the continuing softness of sterling, down 1.7% in trade weighted terms since the last policy meeting, and a 6.4% further rise of world oil prices.  The dissenters will do so again but are unlikely to attract new converts from the committee majority to their point of view.

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



Comments are closed.