Bank Of England Preview: Waiting For Carney‏

We expect the Bank of England (BoE) to remain on hold at Thursday's Monetary Policy Committee (MPC) meeting (13:00 CET). Any policy changes on Thursday would be a surprise. All analysts surveyed by Bloomberg expect both unchanged rates and the Asset Purchase Facility (APF) to be kept on hold at GBP375bn.

Recent statements from MPC members, as well as the latest minutes, suggest that the MPC in general has less confidence in additional quantitative easing. We do not expect any policy changes for the remaining period of Mervyn King's governorship.

More interesting is that on Thursday Mark Carney will appear before the Treasury Committee (10:45 CET). Mr Carney has recently promoted nominal GDP (NGDP) targeting as a way to communicate and manage monetary policy expectations. Here we review his comments as well as the possible implications of NGDP targeting.

No changes on Thursday’s MPC meeting
The MPC minutes from the January meeting were largely as expected, with David Miles continuing to vote for an immediate expansion of gilts purchases (he has done it for three meetings now). The minutes indicated some concerns about the potential for inflation persistence and uncertainty of the effectiveness of additional asset purchases: ‘There remained uncertainty about their [asset purchases] impact on nominal demand , and they might prove less effective in boosting real output (...) had strengthened the belief of some of these members that no further asset purchases were required at the current juncture’

More colours of this view was given in recent comments from MPC members. In his final regional speech in Northern Ireland, Governor King stated his view that monetary policy cannot solve all economic problems, ‘generalised monetary stimulus is not a panacea’. But he did not rule out further asset purchases should the economy deteriorate further. This was also the essence of external MPC members Ian McCafferty’s first public speech a couple of weeks ago. He expressed concerns about the marginal efficiency of asset purchases and ‘fears of such demand stimulus would have inflationary consequences’. Without over-interpreting his wording we would classify McCafferty as a median voter with a hawkish bias.

Hence, we think the MPC view the economy developing in line with the November Inflation Report (with GDP slow recovering and inflation to be above target until mid 2014). We do not see the MPC to impose any material policy changes before Mark Carney takes over the chair as governor. One possible change could though be a reinvestment of the redeemed gilts currently in the APF (GBP 6.1bn in March, 1.6bn in September). But such a change should merely be viewed as a technical adjustment to maintain the current policy.

Note, that BoE will publish the next Inflation Report next week (13 Feb) and new forecasts will be available on this week’s MPC meeting.

To Read the Entire Report Please Click on the pdf File Below.