Bank of England Preview

March 6, 2012

The Monetary Policy Committee’s Thursday announcement at 12:00 GMT will retain existing policy settings:

  • The British Bank Rate has been 0.5% since March 2009.
  • The asset purchase program ceiling was raised at the February meeting by GBP 50 billion to GBP 325 billion in a 7-2 vote and will not be completed until the end of April.  No need exists to address the target again until then.

Earlier this month, policymakers debated whether to extend quantitative easing by GBP 50 billion or GBP 75 billion.  The 7-person majority favored the smaller increase and tellingly claimed in the meeting’s minutes that "an increase of £50 billion in the stock of asset purchases would represent a material monetary stimulus, and it was not clear that a stimulus larger than that was warranted at the current juncture. In addition, given market expectations, a larger increase risked sending a signal that the Committee thought the economic situation was weaker than it was."

Policymakers felt that external risks were less dire, particularly after the ECB’s LTRO operation.  There was also some thought that inflation might not decline quite as extensively as assumed in the baseline forecast.  British GDP contracted 0.8% at an annualized rate last quarter but seems likely to return to positive growth in the present one.  The manufacturing PMI averaged 51.6 in January-February versus 48.4 in 4Q11, while the service sector purchasing managers index had a mean of 54.9 over the past two months versus 52.5 in 4Q11.  February’s construction PMI printed at 54.3, well above the 50 breakeven line.  The CBI industrial trends survey improved 20 points to minus 2 last month, and the retail survey index went from minus 23 in December to negative 16 in January and minus 3 last month.  Nominal retail sales in January increased 0.9% on month and 4.4% on year, each more than predicted but was associated with the lowest price deflator since November 2009. 

Inflation is receding on other measures, too.  With the value added tax hike of January 2011 dropping out of 12-month comparisons, CPI inflation has fallen from 5.2% in September to 3.6% in January with a core rate of 2.6%, and PPI inflation is also trending lower.  Sterling has been reasonably stable.  Even those policymakers who favored the smaller GBP 50 billion increase of asset buying at the February meeting believe that inflation is likelier to lie below the 2% target than above such for most of the policy horizon.  But there’s no need or urgency to revisit the question of extending quantitative easing beyond GBP 325 billion until the May meeting, and inflation prospects are subject to large uncertainty both to the upside and downside.  May’s decision hinges on what happens between now and then.

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



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