Bank of England Preview: No Changes this Month but May’s Decision is Still Up in the Air

April 4, 2012

The Monetary Policy Committee’s decision, due at 11:00 GMT on Thursday, is expected to be no different from that in March.  The 0.5% Bank Rate will be retained for one thing, its level for the past 37 months.  For another, a likely 7-2 vote will keep the asset purchase plan limit at GBP 325 billion.  In February, such was raised by GBP 50 billion, and the new level is not to be reached until the end of this month.  Only a big deterioration of the economy would persuade other committee members to join the minority dissent of Miles and Posen, who want a GBP 350 limit to cut the chance of persistently deficient growth.

If, as expected, no policy changes are announced, the composition of tomorrow’s policy vote will not be revealed until minutes of this week’s meeting are released on April 18. 

Minutes from the March meeting found the economic data since the February meeting to have been roughly in line with expectations and the balance of price and growth risks not to have changed.  Data over the past month have been mixed and not skewed enough to warrant changing the stance. 

  • The PMI indices — a 14-month high of 55.3 in services, a 14-month high of 56.7 in construction, and a 10-month high of 52.1 in manufacturing — are encouraging.
  • Banking data are worrisome.  M4 slumped 1.9% on month in February and 3.4% over the prior 12 months.  Mortgage approvals fell to an 8-month low.
  • Retail sales volume sank 0.8% in February, while industrial production’s January drop of 0.4% was bigger than assumed.
  • Price data point to the long-awaited downturn.  CPI inflation was 3.4% in February, down from 5.2% last September.  Wages remain very subdued.  Shop prices were 1.5% higher in March than a year earlier.  But the PPI’s 4.1% reading exceeded expectations, and elevated commodity prices, as everywhere, pose an upside risk to the Bank of England’s forecast.
  • Real GDP contracted 1.2% at an annualized rate in the final quarter of 2011 and was just 0.5% greater than in 4Q10, but GDP in the first quarter of 2012 is likely to have reversed the fourth quarter’s drop and possibly have recovered some additional ground.

With the Fed and ECB sending messages that have led investors not to expect additional stimulus anytime soon, share prices have a great excuse for a correction.  With confidence waning that the euro debt crisis can be capped, the market outlook could look much uglier when British monetary officials meet in early May.  Whether the asset purchase plan is expanded further at that time depends on the flow of data and other information between now and then.

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



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