Bank of England

inspector_monkfish

07:46 10Sep09 BoE and the Balance of Risk


September 10, 2009

UK Q3 GDP is likely to register a positive outcome indicating that the
recession has come to an end. NIESR GDP estimates, for the 3-months ending
August, showed growth of 0.2% supporting the strong possibility that Q3 will
come in positive. However, the NIESR estimate also highlights that the UK
economy will grow at a very slow/anemic pace and more in tune with stabilization
as opposed to a recovery. The slack that has been built up by the economy is not
going to be worked off and instead a widening output gap will continue to put
downward pressure on inflation.

Indeed the BoE seems to be highlighting a shift in focus away from GDP
growth and toward the level of GDP as a factor that will weigh on inflation. The
BoE is uncertain as to the durability of any recovery but what is important is
that the majority view is that 175bn is enough; despite BoE King's preference to
do more not less on a risk management approach to policy. It would seem that
November, when updated inflation and growth projections are available, is the
best time to adjust policy but financial markets are speculating that the BoE
could cut the rate paid on reserves.

We do not think this is likely as 1) the BoE has not talked about this as an option with the issue being a focus after Sweden's move 2) the BoE see hoarding as a part of QE and 3)it would only increase pressure on banks as variable savings rates have hit a floor.Given that the level of GDP is not expected to increase significantly and
the prospect that M4 growth remains low the balance of risk is still toward the
BoE extending QE beyond 175bn.

inspector_monkfish

07:00 10Sep09 - Bank of England to keep foot on monetary accelerator
* UK interest rates set to stay at record low 0.5 pct
* No change expected in quantitative easing target
* BoE to keep policy loose until recovery more entrenched

LONDON, Sept 10 - Optimism in an imminent recovery is growing but Britain's central bank is unlikely to take its foot off the monetary accelerator just yet.

Analysts expect the Bank of England to keep interest rates at a record low of 0.5 percent not just on Thursday but well into next year. It is also likely to make no change to the pace with which it is pumping money into the economy by buying assets.

While many other central banks are talking increasingly about exit strategies, Britain's central bank has stood out with its dovish stance and its warning that the recovery could be fragile.

Its decision to increase its asset purchase programme to 175 billion pounds last month surprised many in the market, and minutes showed that three of the bank's nine committee members, including Governor Mervyn King, had wanted an even bigger increase.

That revelation means there is a chance the BoE decides it needs to do more to get money flowing through the economy, either by raising its QE target further -- allowing it to create money at a faster rate -- or lowering the rate it pays on commercial banks' reserves.

However, there is little urgency for the BoE to act. Green shoots of recovery are appearing by the day and its current asset purchase programme is not due to end until the start of November.

"Having raised the QE total by 50 billion pounds last month most Monetary Policy Committee members will probably prefer to wait and see if evidence is mounting that the policy is working," said Howard Archer, chief UK economist at Global Insight.

BRIGHTER OUTLOOK

Britain's central bank launched its quantitative easing programme in March with the aim of heading off deflation by raising the amount of money in circulation to get banks lending and consumers spending again.

Money supply figures have yet to provide conclusive evidence that QE is having the desired effect, but there is little doubt that Britain's economy is emerging from recession.

Consumer confidence has picked up, employers have started hiring again and surveys suggest output in both the services and manufacturing sectors is expanding.

Even the housing market has enjoyed something of a rebound. House prices rose for a fourth month running in August and at their fastest monthly rate in more than two years according to the Nationwide Building Society.

The broader international backdrop is also encouraging. Global merger and acquisition activity has picked up, credit spreads have fallen and European stock markets are testing levels not seen since October.

The upbeat tone of recent data prompted Capital Economics to revised up its UK growth forecasts on Wednesday. But the consultancy said weakness in the banking sector and the imminence of tax rises or spending cuts meant Britain's recovery could lag that of its peers.

"Fiscal policy looks likely to tighten rather earlier in the UK than in the United States and at least parts of Europe," said the consultancy's chief economist Jonathan Loynes.

"We still expect monetary policy conditions to remain loose for a prolonged period, with official interest rates perhaps staying at their current level until 2011 or beyond."

purch

"We still expect monetary policy conditions to remain loose for a prolonged period, with official interest rates perhaps staying at their current level until 2011 or beyond."

Yes that will no doubt be the case, but it cannot be beyond the realms of possibility that the Base Rate might be cut to 1/4% and the rate paid on reserves drop to zilch !!! ............. probably not this month, but maybe at some point in the next quarter.

It would certainly raise the stakes quite aggressively, but might be necessary if the QE monies continue to be 'snarled' up in the Banking system and not flowing into the general economy.

inspector_monkfish

purch wrote: »

Yes that will no doubt be the case, but it cannot be beyond the realms of possibility that the Base Rate might be cut to 1/4% and the rate paid on reserves drop to zilch !!! ............. probably not this month, but maybe at some point in the next quarter.

It would certainly raise the stakes quite aggressively, but might be necessary if the QE monies continue to be 'snarled' up in the Banking system and not flowing into the general economy.

it'll certainly cheer the brokers up !!

Jonbvn

So no possibility of a cut?
http://blogs.telegraph.co.uk/finance/edmundconway/100000861/a-40pc-chance-of-a-rate-cut-really/

inspector_monkfish

Jonbvn wrote: »

So no possibility of a cut?
http://blogs.telegraph.co.uk/finance/edmundconway/100000861/a-40pc-chance-of-a-rate-cut-really/

there is always a 'possibility'

but that story in the telegraph is talking about a cut to the rate at which the BOE pay Banks to deposit cash with them, which is currently the same as the base rate, 0.50%.

this could well be cut, but probably not the base rate.

Jonbvn

inspector_monkfish wrote: »

but that story in the telegraph is talking about a cut to the rate at which the BOE pay Banks to deposit cash with them, which is currently the same as the base rate, 0.50%.

I thought that was the definition of the base rate???

Anyway, the point I was trying to make was that a hold was not a foregone conclusion, given that the MPC has suprised us before.

inspector_monkfish

Jonbvn wrote: »

I thought that was the definition of the base rate???

Anyway, the point I was trying to make was that a hold was not a foregone conclusion, given that the MPC has suprised us before.

no they are 2 different things


absolutely - never a foregone conclusion these days

Dan:_4

i'll bl.oody love a 0.25% cut today.

Generali

Jonbvn wrote: »

I thought that was the definition of the base rate???

I think the base rate is the 'repo rate' for the BoE. That is the rate of interest at which the BoE will lend money to banks, secured against Gilts.

thriftybabe

It is good to read that things are going well. However, as soon IR's go up I think we will be in trouble!