Bank of England Preview: No Change Anticipated

July 4, 2011

This week’s meeting of the Monetary Policy Committee will probably result in another decision to leave the Bank Rate at 0.5% and the ceiling on asset purchases at GBP 200 billion.  Those policy parameters were last changed in March 2009 and November 2009, respectively.  The policy announcement will be made at 11:00 GMT on Thursday.  Minutes from the May meeting were more dovish than those from earlier meetings in part because of the departure of arch-hawk Andrew Sentance.  A door was left open for a possible future extension of the asset buying program.

The current weakness of demand growth was likely to persist for longer than previously thought. Moreover, the fiscal challenges in the euro-area periphery highlighted the potential for further adverse shocks to demand. For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialised.

The residual chance of more easing by the Bank of England even as the ECB Governing Council prepares for its second rate hike, also on Thursday, has depressed sterling.  The pound’s depreciation loosens monetary policy in a passive way, eliminating any urgency to stimulate more directly.  Sterling is trading some 9% weaker against the euro than it was six months ago, and the trade-weighted pound is down about 5%.  The synthetic sterling cross against the old D-mark is near its all-time low hit after Britain abandoned the old Exchange Rate Mechanism in the 1990s.  The Bank of England doesn’t have to ease policy now, and MPC members Dale and Weale were recommending a Bank Rate hike as recently as May.

British economic data over the past month have been disappointing, nonetheless.  The construction PMI averaged 53.6 in 2Q11, down from 55.6 in the first quarter.  The manufacturing PMI slid by 0.7 to 51.3 in June and averaged 52.6 last quarter compared to a mean reading of 59.8 in 1Q.  The services monthly index fell by 1.2% in April and was just 0.8% higher than a year earlier.  Real GDP over the six quarters of recovery to 1Q11 has expanded just 1.7% at an annualized pace, with consumer spending eking out a mere 0.5% rate of increase and net exports exerting a neutral effect on the economy.  The retailer survey of the CBI indicated a sharp deterioration from +18% in May to negative 2% in June, worst since August 2009.  The GFK measure of consumer confidence worsened four points last month to a reading of minus 25.  House prices are lower than a year ago.

Central bank officials believe that inflation will ebb next year after touching a high of around 5% in 2011.  CPI inflation is currently at 4.5%.  Second-round inflation is not evident, and wages should stay subdued.  The claimant count of unemployment rose 36.5% in April-May after a gain of only 1.6K in the first quarter.  Thursday’s press announcement will likely only state the committee’s action and direct people to watch for the meeting minutes on July 20 for details of the latest thinking and the formal policy vote.

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



One Response to “Bank of England Preview: No Change Anticipated”

  1. It is generally well know that I dislike hypocrites and this includes Bank of England employees (even high level ones) who talk the pound down whilst publicly stating that they “neither talk sterling up or down”.

    That said, Since Mr Fisher has been busy talking the pound down, I am sure that in line with this post, there is absolutely no chance of a rate hike any time soon.