Bank of England Preview

October 2, 2012

The primary tool of British monetary policy since March 2009 has been the Asset Purchase Program, which has been expanded periodically as needed and most recently by GBP 50 billion in July to a limit of GBP 375 billion.  That higher ceiling will not be reached for another month, so announcement of a policy expansion at this time is remote.  Thursday’s statement at 11:00 GMT will give just the basics: noting that the Bank Rate has been at 0.5% since March 2009, that APP was last raised in July 2012, and that minutes of this month’s meeting will be published October 17.  No clues about the meeting will be conveyed.  The big debate in the market concerns the November meeting.  Expanded quantitative easing then is probable, but reasonable doubt exists that such will be done that soon.

Minutes from the September Monetary Policy Committee meeting revealed a unanimous 9-0 vote against expanding QE but indicated that for one member the vote over whether or not to ease had been “finely balanced.”  The minutes do provide some fodder against continuing to expand bond purchases progressively.

  • Some policymakers are concerned about rising collateral damage of this approach.  This is a diminishing returns argument not unique to Britain.
  • Some are hopeful that the Funding for Lending Scheme (FLS) may prove to be an effective alternative way to promote credit growth.  It’s too early in that facility’s life to know the answer.
  • Policymakers by early September felt that inflation was likely to recede over the rest of 2012 more slowly than predicted in the August Inflation Report because of higher oil prices and planned utility fee hikes.  At 2.5%, CPI inflation is still a half percentage point above target and has been above the desired level without interruption since December 2009.

Over the past month, moreover, financial markets have become less distressful due to hope that the Ezone debt crisis will be contained.  The drop in British real GDP growth in the second quarter was again revised inward to 1.8% at an annualized rate from an initial estimate of minus 2.8%.  Nevertheless, the U.S. continues to experience a recession, which is being fueled in new ways.  One is net foreign demand.  The current account swelled to a record deficit of GBP 20.767 billion in 2Q12 from GBP 15.366 billion in the first quarter and GBP 8.456 billion in the final quarter of 2011.  The global economy continues to lose momentum.  Another future depressant will be budget restraint.  Fiscal deficits are running above target, necessitating more austerity.  Government spending slumped over 6.0% annualized in 2Q.  A third source of drag comes from construction, whose purchasing managers index has punched in below the 50 no-change threshold in three of the last four months including September.  Fourth, housing has struggled.  The Nationwide house price index posted an on-year decline of 1.4% in September, twice the drop in August.  Fifth, the manufacturing PMI, which had rebounded after the Jubilee and Olympic celebrations, to print at 49.6 in August from a mean score of 46.9 in June-July, relapsed disappointedly to 48.4 in September. And sixth, the services index in the three months to July was just 0.1% above the level in the prior three months. 

If this were November, not October, the balance of known forces and vast uncertainties probably would propel policymakers to expand asset buying further, but for one more time they have the luxury of waiting and observing developments over the coming month before such a decision has to be made.

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

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