- Thursday May 9, 2013, 12.00pm BST
ANALYST FORECASTS
Interest-Rate Forecasts- Median: 0.50%
- Mean: 0.50%
- High: 0.5%
- Low: 0.5%
- Number of forecasts: 52
Asset-Purchases Forecast
- Median: £375bn
- Mean: £376bn
- High: £400bn
- Low: £375bn
- Number of forecasts: 44
RECENT ECONOMIC DATA
Recent economic data has eased the pressure on the Bank of England (BoE) to loosen monetary policy at its May meeting. Nevertheless, with some members of the Monetary Policy Committee (MPC) firmly in the dovish camp, it will be a close call. Further, it is likely that the Bank will want to evaluate the impact of the Funding for Lending Scheme, which was recently given a boost.
Economic data has lessened the case for the BoE to take immediate action. UK GDP increased by 0.3% in the first-quarter of 2013, banishing the spectre of a triple-dip recession. The reading came in ahead of the BoE’s forecast of 0.1% growth in the first-quarter, made in February’s Quarterly Inflation Report.
The latest composite purchasing managers’ index (PMI) – which is considered a leading growth indicator – also signalled that the UK economy grew at the fastest pace in eight months in April, rising to 52.1 from 51.0 in March. This is good news, and suggests that economic growth seen in the first-quarter of 2013 may continue.
CPI Inflation remains above the Bank’s 2% target. Weak inflation gives the BoE more room for manoeuvre in terms of adding monetary stimulus. Anthony O’Brien of Morgan Stanley says that “lessening worries about inflation risks might open the door for more policy action.”
In February’s Quarterly Inflation Report, the BoE forecasted that annual inflation would be 2.73% in the first-quarter of 2013; and at 2.78% in March, the current rate of inflation isn’t far off estimates.
Since real wages are not growing, oil and commodity prices have fallen in recent weeks, and sterling has risen, Robert Wood, chief UK economist at Berenberg Bank, argues that the BoE is likely to lower its inflation forecast in the May Quarterly Inflation Report, due for release on 15 May.
Philip Shaw, an economist at Investec, adds, the new forecasts are unlikely to shift the MPC’s de facto position of maintaining policy with a bias towards restarting asset purchases.
POLICY OUTCOMES
The base rate is expected to remain unchanged at 0.5%. However, Brian Hilliard, chief UK economist at Societe Generale, warns that the question of a rate cut will be discussed after the European Central Bank (ECB) slashed its rate last week in response to weak Eurozone growth. Given that Europe is the UK’s largest trading partner, Hilliard says it raises some questions… about the UK growth outlook.
A rate cut was discussed in some detail by the MPC towards the end of 2012, with the BoE ultimately keeping it on hold, after some members expressed concern about how effective it may be in boosting the economy.
While the rate of economic growth remains modest, Chris Williamson, chief economist at Markit, says, the rate of growth… is running at a pace which has historically been consistent with policy stimulus, suggesting that some members of the MPC will still see a need to provide a further boost to the still fragile looking revival, especially as global growth appears to be slowing.
Many analysts now feel that it is a matter of when -- not if -- the BoE will add to its £375bn of asset purchases. Howard Archer, chief economist at IHS Global Insight, says, it is by no means a nailed-on-certainty that the MPC will sit tight on Thursday, and it is far from inconceivable that they could go for a further £25bn of QE.
At the previous policy meeting, governor Sir Mervyn King, Paul Fisher and David Miles all voted to boost QE (the vote was 6-3 against more QE, meaning that only two more MPC members need to be convinced).
Nevertheless, Ross Walker, economist at RBS, notes that recent speeches and comments by [MPC members] Bean, McCafferty, Tucker and Weale have conveyed the message that the underlying economy may be a little better than the headline data suggest, while there are limits to what further monetary policy easing can achieve. Clearly this does not preclude support for further QE but it does suggest an inclination to leave policy settings on hold at this stage.
LOOKING AHEAD
Many analysts believe that conditions are such that the MPC will keep policy on hold, at least till new governor Mark Carney takes office on July 1. In addition to overseeing the August inflation report, we already know that Carney likes the idea of giving the market Fed-style “forward guidance,” which some are speculating could be announced in August or November.
RECENT COMMENTS FROM MPC MEMBERS
- May/1/2013 Paul TUCKER
- Apr/29/2013 Ian MCCAFFERTY
- Apr/18/2013 Martin WEALE
“The inflation position, at least from my perspective, has improved somewhat,” and “They certainly make me feel there’s more room for manoeuvre than there would have been if they hadn’t happened.
- Apr/5/2013 Spencer DALE
- April/9/2013 Paul FISHER
- Feb/27/13 Charlie BEAN