Bank Of England Preview: No Move From The MPC

We expect the Bank of England to remain on hold at Thursday’s Monetary Policy Committee (MPC) meeting. We think the BoE will stay in wait-and-see mode in the near future. As consensus is almost unanimous on unchanged policy, we expect a muted market reaction following the MPC decision.

Recent indicators point to a moderate improvement in the UK economy and we expect it to take a substantial setback in leading indicators to trigger more stimuli from the MPC. Note, however, that there is still significant uncertainty relating to fiscal tightening in coming years.

The recent MPC minutes as well as public statements from MPC members indicate a great trust in the Funding for Lending Scheme (FLS), boosting credit growth and ultimately overall activity. We have looked at recent developments in loan flows.

Moderate improvement in leading indicators...
In the latest Inflation Report, the MPC revised its forecasts on GDP and now expects a gradual rebound in UK activity, to reach 2% y/y growth at the end of 2013. The recovery was once again revised downwards and the MPC now forecasts GDP to remain below its pre-crisis level until the end of 2015. Despite the very moderate growth expectations, the signals from MPC members suggest a satisfaction with current policy and that it would take a setback in the recovery to trigger any additional stimulus.

We have seen a gradual improvement in data in 2012. UK manufacturing PMI increased to 49.1 in November (from 47.5). Manufacturing PMI has been very volatile in the past year underpinning the great uncertainties in the UK economy. When we correct the latest seemingly strong Q3 12 GDP number for the disruptions from the Jubilee holiday and the Olympics, we estimate an improvement of underlying growth 0.2-0.4% q/q.

The Inflation Report forecasts inflation to remain above 2% until 2014, reaching the monetary target later than previously expected. However, several MPC members have since the last meeting indicated that the door for additional QE has not been closed and that domestically generated inflation is not a major concern. It is worth mentioning that the statements have been made from members not usually associated with a dovish stand (e.g. Bean, Fisher & Weale) suggesting that the distance from additional QE may not be as big as the minutes from the November meeting indicated.

In various public statements as well as highlighted in the past two MPC minutes, the effect of additional QE has been discussed. Hence, it seems that the majority of MPC members place a greater trust in the Funding for Lending Scheme (FLS) to boost credit growth and ultimately overall activity. With recent statistics in mind, it is not an overstatement to conclude that the FLS has had a slow start.

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