Bank of England Preview

January 10, 2012

The Monetary Policy Committee (MPC) will make its first scheduled credit policy announcement of 2012.  A change in policy settings seems unlikely, but investors will be hunting for clues to a likely further extension of asset purchases at the February meeting, which a quarterly comprehensive review of the macroeconomic forecasts occurs.  Minutes from the December 7-8 meeting indicate that officials saw “little merit in changing the path of asset purchases” amid continuing substantial uncertainties, a mix of views among committee members and the fact that extended quantitative easing announced last October would not be completed until late January.  The December vote had no dissenters. 

The so-called asset purchase program was inaugurated with a ceiling of GBP 75 billion in March 2009 when the Bank Rate was halved to 0.5%, a level below which officials continue to believe would do more damage than good.  The quantitative ceiling was raised by 50 billion pounds in May and again by that amount in August of 2009.  In November 2009, a third increase, this time by a smaller GBP 25 billion to GBP 200 billion was announced by the central bank.  The ceiling stood at that level until October 2011, when such was increased by GBP 75 billion.

Public comments by central bank officials over the holidays were few and not very newsworthy.  The MPC as a whole and its governor seem to have a dovish bias.  Growth and inflation risks lie to the downside, financial conditions are a bit strained, and there is considerable trepidation about the implications of the euro debt crisis and decisions made at the December EU summit over the objections of Prime Minister Cameron.  This week’s cover story in “The Economist” deals with threats to Britain’s financial center institutions.  The December minutes noted that some members believe it will become necessary to expand quantitative easing further “in due course.”

Released data since the MPC’s December meeting at least suggest that GDP likely expanded slightly in the fourth quarter.  Back then there was fear that a technical recession might have started that quarter.  The manufacturing purchasing managers index rose 1.9 points to 49.6 last month.  The construction PMI increased 0.9 points to 53,2, and the services PMI went up 1.9 points to a five-month high of 54.0.  Unemployment rose less in November than expected, the trade deficit narrowed sharply in October, indications of consumer confidence have been mixed, and Christmas shopping ended with a burst in the final week.  On the other hand, CPI inflation has at long last begun to subside, dropping to 4.8% in November from 5.2% in September and to a 3.4% core rate from 3.7%.  GDP rose 2.3% on quarter at an annualized rate in 3Q but by only 0.5% from the third quarter of 2010.  The current account posted a deficit that quarter equal to 4% of GDP.  The index of leading economic indicators is decreasing. 

Thursday’s policy announcement will be made at the customary hour, 12:00 GMT.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



One Response to “Bank of England Preview”

  1. gobot says:

    I dont agree with this 100% but it brings up some excellent points.