King Faces 10 Days of Angst on BOE Stimulus
Reports starting tomorrow on manufacturing, construction and services, as well as consumer credit and house prices, will set the scene for data crunching by officials building up to a decision on quantitative easing on May 10. King and the eight other members of the Monetary Policy Committee will discuss new economic forecasts that will determine whether they extend QE or halt it at 325 billion pounds ($529 billion).
Overshadowing the MPC’s deliberations is the U.K.’s first double-dip recession since the 1970s as its longest peacetime slump for a century persists. While gross domestic product has fallen for the past two quarters, King must also take into account an inflation rate that is above the central bank’s target and policy makers’ forecasts.
“It’s not getting any easier for King,” said David Tinsley, an economist at BNP Paribas SA in London and a former Bank of England official. “The GDP release has made the situation more ambiguous in terms of what the MPC might do in May and the inflation story is complicating matters.”
Policy makers are due to gather for the “pre-MPC meeting” with economists and other officials at the Bank of England’s headquarters in London on May 4, where they will be briefed on economic developments. They will start their two-day policy meeting on the afternoon of May 9 and announce the decision at noon the following day.
The pound strengthened against the euro for a third day, climbing to a 22-month high, and touched an eight-month high against the dollar. Sterling rose 0.3 percent to 81.26 pence per euro at 12:32 p.m. London time. The U.K. currency was little changed at $1.6269 after climbing to $1.6302, the highest since Aug. 31. The 10-year gilt yield fell 1 basis point to 2.12 percent.
Reports this week may point to a slowdown in manufacturing, services and construction. A gauge of factory activity will fall to 51.5 from 52.1 in March, according to the median of 27 forecasts in a Bloomberg News poll. An index of services, the largest part of the economy, will decline to 54.1 from 55.3, while a construction measure will also fall, economists said in separate surveys. A reading above 50 indicates expansion.
The reports will follow data on April 25 that showed the economy shrank 0.2 percent in the three months through March. That contrasted with the purchasing-manager reports for the period, which pointed to growth of as much as 0.5 percent, according to Markit Economics, which compiles the surveys.
“It’s a trickier decision than recently,” said Victoria Cadman, an economist at Investec Securities in London. “They’ve got a big mix of evidence not only to look at, but to make a judgment on whether they agree or disagree with those particular releases. It could be a fairly detailed discussion.”
While policy makers have indicated a preference for underlying indicators over headline GDP in assessing the economy, Martin Weale said on April 26 that the argument for more stimulus has increased after the contraction. The central bank is due to finish its current QE round early next month.
The MPC also said this month that GDP declines “might further damage household and business confidence, even if the underlying pace of economic expansion were stronger.” Policy maker Adam Posen, who said before the GDP report that the economy is probably stronger than what official data will show, has also warned of “confidence shocks.”
David Miles, the only MPC member to vote for more QE in April, said in an April 24 interview that growth is “pretty weak” and seeking more stimulus was the “right strategy.”
“We do not believe the economy is as weak as the official data portray, but it is still likely to be growing well below potential next year,” Brian Hilliard, an economist at Societe Generale SA in London and a former Bank of England official, said in a note published today. “Our current forecast is the MPC has reached the end of the QE road, but a significant risk remains of a further increase later in the year or in 2013.”
King is due to speak in London on May 2, when he delivers a public lecture hosted by the British Broadcasting Corp. at 9 p.m. He will also take questions from the audience.
Earlier that day, the Bank of England will publish consumer credit and mortgage approvals data, while Nationwide Building Society will release its monthly house-price report on May 3. Hometrack Plc said today that property values rose in April for a second month, though it doesn’t expect the gain to be sustained.
In the U.S., Federal Reserve officials said last week that they expect growth to stay “moderate,” and adhered to a goal of keeping borrowing costs low through 2014. The world’s largest economy expanded at a 2.2 percent annual rate in the first quarter, less than economists forecast.
Other central banks are continuing to expand their stimulus programs. The Bank of Japan (8301) said on April 27 that it will boost its asset-purchase fund to 40 trillion yen ($496 billion) by June 2013, compared with the previous target of 30 trillion yen by year-end. Central banks in India and Brazil both cut their benchmark interest rates this month.
For Royal Bank of Scotland Group Plc, Britain’s return to recession won’t be enough to counter inflation concerns at the Bank of England. RBS economists including Richard Barwell said last week the central bank won’t expand stimulus again, changing a previous forecast of a 50 billion-pound increase in the second half of 2012.
“Recent economic data -- notably stickiness in inflation and an improvement in a number of survey indicators -- mark a continuing evolution within the MPC,” the economists said. There has been an “incremental move” away from a loosening bias, they said, noting Posen’s decision to abandon a push for more QE at the April policy meeting.
Consumer-price growth accelerated in March for the first time in six months, quickening to an annual 3.5 percent. Inflation has been above the central bank’s 2 percent target every month since December 2009.
More than half of Britons feel pessimistic about their family’s disposable income as inflation outpaces wage growth, Deloitte LLP said today, citing a YouGov Plc (YOU) survey. Fifty-one percent of the 1,000 people in the quarterly study carried out on March 30 said they are downbeat about their household’s disposable income compared with a reading of 49 percent three months earlier, Deloitte said in an e-mailed statement.
“The MPC is facing the difficulty of handling weaker growth and high inflation,” said Jens Larsen, chief European economist at RBC Capital Markets in London and a former Bank of England official. “It makes the communication challenge bigger.”
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