Bank of England Preview

January 9, 2013

No policy changes are likely or expected at the first Monetary Policy Committee meeting of 2013.  The Bank Rate has been 0.5% since March 2009.  Each time the committee has reviewed the possibility of cutting such to support growth, the idea has been rejected on the grounds of collateral damage associated with such a move and the conclusion that quantitative easing is less risky.  The MPC routinely endorses keeping the 0.5% and does so unanimously.

An asset purchase program (APP) was introduced initially in the spring of 2009 and last modified in July.  At that time, officials debated an APP ceiling increase of GBP 50 billion or GBP 75 billion, deciding on the former to a new GBP 375 level and allocated four months to the completion of the incremental tranche, that is through end-October. 

The British policy experience showcases the difficulty of imposing fiscal austerity in a depressed U.K. and global growth environment.  In such circumstances, deficit reduction proves elusive, undercut by the persistence of weak economic activity and tax revenues.  Although British GDP jumped 3.8% at an annualized rate in the third quarter of 2012, the on-year change was zero, and more recent data point to another quarter of negative growth in 4Q12.

  • The service sector purchasing managers index printed at 48.9 in December, its worst reading since April 2009.
  • The construction PMI reading of 48.7 last month was at a six-month low.
  • The manufacturing PMI averaged a sub-50 49.5 last quarter.
  • Industrial production dropped 0.8% in October and 3.0% from a year earlier.  Factory output sank 1.3% on month.
  • Consumer confidence fell by seven points to minus 29 in the latest report.
  • Retail sales in September-November were unchanged from the previous three-month period.
  • The merchandise trade deficit continues to exceed GBP 9 billion per month.  The current account shortfall is around 3.2% of GDP.

British officials are prevented from stimulating quantitatively, nonetheless, because of the downward rigidity of inflation.  Officials target the CPI at 2.0%, but it has instead averaged 3.6% per annum over the past three years through November, including 2.7% over the latest twelve months.  Since 2010, officials have systemically under-estimated the path of inflation, blaming the error on a series of special factors.  Minutes from the December meeting conceded that inflation would probably stay above the 2.0% target in 2013 because of food price pressures.  The minutes moreover felt that the latest round of asset purchases had not yet fully impacted the British economy, so a wait-and-see stance was favored by an 8 to 1 majority of the MPC.  David Miles, who joined the committee in mid-2009, was the sole dissenter favoring an expanded APP now.  Mervyn King remains Bank of England Governor but not for much longer.  His term runs out in a couple of months, and he will be succeeded by Mark Carney, the present Governor of the Bank of Canada and a former employee of Goldman Sachs.  Carney is believed to be more hawkish in temperament than King.

There has been little net change in the pound against the dollar or euro since the December MPC meeting.  The 10-year gilt yield is 27 basis points higher, however.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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