Few Expect BOE Bond Buying to Resume (But it’s a tough call.)

First off, if there’s still any doubt left, here is a summary of major banks / brokerages’ views about the likely outcome of Thursday’s Bank of England Interest Rate and asset purchase decisions:

 

Bank Rates QE
Nomura No change GBP25 billion extra*
Citi No change GBP25 billion extra
Investec No change GBP25 billion extra
Barclays No change “One-in-five chance in further QE”
BNPP No change No change but it’s “a close call”
Lloyds No change No change QE “but…a tight call”
BofAML No change No change, for now
RBS No change No change
Daiwa No change No change
Goldman’s No change No change

*GBP25 billion worth of further Bank of England asset purchases would bring the total amount of bond purchased by the BOE in its current purchasing cycle to GBP350 billion.

As for June, many economists appear to be indicating that calling a move on rates and especially further asset purchases will remain difficult.

The toughness of the call is partly because, for one thing, economic activity data since the last decision have been mixed.

But also, of course, GDP data showed a 0.2% tightening in 1Q, putting the UK ‘technically’ into a recession.

Additionally April’s CIPS business data showed softer rates of growth with solid rises in construction output says Markit, the survey report’s publisher.

Note the chart linked here shows CIPS is going back to where it was when policy was being loosened: surveys are heading back into the territory consistent in the past with loosening.

The odds may have changed, as much as they’re quantifiable in any concrete way [I don’t think they are!]

Anecdotally though, we can note the rise in inflation in March and Adam Posen dropping his vote for another £25bn of asset purchases. Additionally, minutes of the last MPC meeting show its members thought “there was a greater chance than before that above-target inflation would persist into the medium term.”

At April’s meeting, the MPC said current challenges facing the Committee have been thrown into sharp relief “by the downside news on the near-term path of GDP likely to be published by the ONS and by the upside news on the near-term path for inflation.”

And so it came to pass, more or less.

All told, however, I suspect the MPC is likelier to continue focusing on which direction inflation is likely to go in, rather than putting priority on any other economic measure.

Here’s why:

  • UK Inflation in 1Q averaged 3.5%.

February’s Inflation Report  [For confirmed data geeks only, contains a page with BOE’s PDF reports] suggested 1Q inflation would be 3.4%.

  • Seasonally-adjusted monthly changes, which the MPC is putting more weight on still suggest inflation above 2% target.
  • MPC members were concerned even before March’s figures that the latest Inflation Report forecast for a sharp drop was too optimistic.
  • MPC flagged last month that the official measure of GDP might have       contracted and that it would put little weight on the figures.
  • MPC may want to wait to see whether the drop in April was just part of the usual monthly volatility.
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