Bank of England Preview
The Bank of England will keep policy unchanged. The Monetary Policy Committee’s decision is due at 11:00 GMT, 90 minutes before the start of the ECB press conference on Thursday. Almost always when not changing policy, the decision is reported initially with elaboration about the committee’s discussion or vote. This will not be an exception. Meeting minutes are due on June 22. The most interesting aspect of this month’s meeting is the retirement of arch-hawk Andrew Sentance, who favors a 50-basis point hike of the 0.5% rate hike. The Committee still has two other hawks (Dale and Weale) wishing to implement a first increase of 25 basis points now, but that minority will continue to be outweighed by a rock-solid majority that is worried about sluggish growth and prefers to wait until the current soft patch has passed before tightening.
The British economy has a nasty combination of excessive inflation and deficient growth. GDP expanded only 1.9% annualized in 1Q, leaving its level unchanged from the third quarter of 2010. Momentum was lost this quarter. Between March and May, the manufacturing purchasing managers index fell by 4.3 points to 52.1, while the services PMI dropped 3.3 points to 53.8. Housing remains in a funk, and a 12.4K rise of unemployment in April was the biggest deterioration in 15 months. Bank of England officials revised projected GDP downward last month.
The May inflation report also projected 2.5% per annum growth over the coming two years if policy remains unchanged and flagged a good-sized possibility that such will crest above 5.0% later this year. Inflation increased a half-percentage point to a twelve-month increase of 4.5% in April. Core CPI also went up 0.5 percentage points, reaching 3.7%. PPI-output and PPI-input currently stand 5.3% and 17.6% above year-earlier levels. But monetary officials do not yet observe signs that above-target inflation is feeding into medium-term expectations or wage demands. The bottom line is that the majority doubts that great harm would be done by delaying tightening a little longer, and one member (Adam Posen) has been recommending an increase in the asset purchase program ceiling form GBP 200 billion to GBP 250 billion. He’s had no takers. I expect votes of 7-2 for an unchanged Bank Rate and 8-1 for an unchanged asset purchase program. The last policy changes were a rate cut to 0.5% in March 2009 and a hike of the APP to GBP 200 billion in November 2009.
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The ten-year gilt yield is a mere single basis point lower than when the May meeting occurred, and sterling is 0.8% softer now than then against the dollar.
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