Bank of England Preview

June 6, 2012

There seems to be close to a 50% chance that the asset purchase program, which is currently at its ceiling authorization of GBP 325 billion could be extended.  A policy announcement is scheduled for 11:00 GMT Thursday following a two-day meeting of the Monetary Policy Committee (MPC).  Although only David Miles on the nine-person committee wanted to ease policy further at the May 9-10 meeting, minutes suggested that several other policymakers were fence-sitting then, and that was before global financial conditions got worse and before a sharp drop in oil prices.

For most members, there was not sufficient reason to change either Bank Rate or the stock of purchased assets at this meeting. The Committee noted that the existing stock of past purchases, together with the low level of Bank Rate, would continue to impart a substantial monetary stimulus to the economy for some time to come. For several members, the decision not to expand the asset purchase program at this meeting was finely balanced. The Committee would continue to monitor the outlook each month and further monetary stimulus could be added if the outlook warranted it.

No doubt exists that Britain is in a recession.  At an annualized rate, British real GDP fell 1.2% in the final quarter of 2011 and by 1.3% in the first quarter of 2012.  A 2.3% monthly decline in retail sales in April was worse than anticipated.  The U.K. manufacturing purchasing managers index printed last month at 45.9, down sharply from an average reading in January – April of 51.2. It looks like manufacturing could contract about 1% in the second quarter.  The CBI survey of industrial trends worsened by nine points between April and May to a score of minus 17.  Fiscal restraint continues.  The drop in GDP last quarter would have been even sharper than 1.3% if not for an unrepresentative 1.6% rise of government spending.

A quarterly inflation report released by the central bank in May raised the near-term profile projected inflation in ill-timed fashion.  Officials said the 12-month increase of consumer prices would stay above the 2% target for another year, but such fell to 3.0% in April from 3.5% in March and 5.2% last September.  Plus, core CPI inflation declined by another 0.4 percentage points to rest at 2.1%.  West Texas Intermediate oil prices are 12.4% lower now than when the MPC met in May.

The ECB seems poised to cut its key interest rate in July.  Growth was recharacterized today as “weak,” and Draghi indicated a readiness to act if this weakness persists.  The Bank of England’s key interest rate is already at 0.50%, a level long ago in March 2009 deemed the effective floor.  Since that time, all further stimulus has been delivered in the form of quantitative easing.

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



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