- We expect the Bank of England (BoE) to remain on hold at Thursday's Monetary Policy Committee (MPC) meeting (13:00 CET).
- While it is still too early to declare that a sustainable recovery is underway, the slightly more upbeat economic data mean those who have so far resisted further policy stimulus have little reason to change their positions.
- As there is a broad consensus on unchanged MPC policy (according to a Reuters poll only three out of 63 analysts expect additional QE at this meeting), we should expect a muted market reaction to the announcement of an unchanged policy.
Recent release of activity indicators have surprised on the upside. The Q1 GDP number came out 0.3% q/q (0.6% y/y), while consensus expected a flat reading. Looking under the headline numbers, the increase was driven by a 0.6% q/q rise in services output, reflecting widespread increases in sector activity. Industrial production grew by 0.2% q/q while there was a 2.5% q/q drop in construction output. Furthermore, the PMIs from last week all improved, some from subdued levels.
Altogether, the minutes from the April meeting did not alter our assessment of the present stance within the MPC. Governor King was once again in the minority, preferring GBP25bn of additional asset purchases, with the voting of 6-3 in favour of maintaining the present policy. The minutes revealed both arguments for the case of more demand stimulus (i.e. asset purchases) and counter-arguments of maintaining the current policy due to the concern of medium-term inflation expectations drifting upwards.
While it is still too early to declare that a sustainable recovery is underway, the slightly more upbeat economic data mean those who have so far resisted further policy stimulus have little reason to change their positions. We expect an unchanged balance between those preferring more QE, and those preferring the status quo.
On April 24, HM Treasury and BoE published the long-awaited adjustment to the Funding for Lending Scheme (FLS). While banks’ funding levels have decreased since the launch July last year, and credit surveys point to an increased credit availability (for all except small and medium sized enterprises), credit statistics are yet to show any substantial effect from the FLS (see chart next page).
Updated forecasts from the May Inflation Report will be available at the meeting - we expect no major changes as both inflation and GDP have on balance evolved according to the February Inflation Report median forecasts.
As there is a broad consensus on unchanged MPC policy (according to a Reuters poll only 3 out of 63 analysts expect additional QE at this meeting), we should expect a muted market reaction to the announcement of an unchanged policy.
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