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Preview: BoE Quarterly Inflation Report

Wed, Nov 11 2009, 10:09 GMT
by RANsquawk Research Team

RANsquawk

King & his knights continue to fight evil that is the credit crunch…

Apart from scrutinizing the latest CPI and GDP projections from the Bank of England, markets will also be looking for hints in regards to the future of the Gilt buyback program which was extended to GBP 200bln last week. The UK's struggle to return to growth has prompted some suggestions that the bond purchases are not having the desired effect. However, King is expected to defend the QE and say that Bank’s asset purchases have helped to boost asset prices and improve access to capital markets. But high level of personal debt, as well as constrained financial system means that the outlook is pointing towards a slow recovery.

Overall, the Bank’s governor King is likely to take a cautious stance on the state of the UK economy with the market expecting the latest projections to show inflation picking up sharply in coming months but returning to target in the medium turn. September may prove to be the floor in annual CPI since oil prices fell sharply in the final months of 2008 and a reversal of last years VAT cut will only add to volatility in the CPI readings. As such the new projections will likely show inflation above 2% target in the near term. However, the committee said it believes that substantial margin of under-utilised resources persists which will continue to bear down on inflation for some time to come. Hawkish comments would benefit the GBP which deflated as a result of aggressive Gilt repurchasing from the BoE. Conversely, more dovish comments would suggest that the Bank will be unwilling or unable to tighten its monetary policy and give rise to Gilt prices.

Desperately seeking growth…

The growth forecast is likely to be little changed from August and is expected to show that the economy may return to growth in Q4. Although the Bank does not explicitly support a weak currency, it is likely to say that weakness in GBP has in part played its role in supporting the recovery. Also, King may cite rising confidence and a boost in asset prices, as well as improved access to capital markets as reasons for recovery. The slower pace of gilt purchases suggests that economic activity will pick up soon and that it may soon be safe to gradually implement an exit strategy. The Bank is also likely to say it has the necessary tools at its disposal to withdraw from accommodative stance and tighten promptly should conditions warrant.

Triple A…but for how long?

Bank of England has a self-imposed rule that requires it to base its projections on the announced fiscal plans of the government. Those plans foresee a halving in the budget deficit by 2014, from 12.4% in the fiscal year to the end of March 2010. However, since the likes of S&P and Fitch are pressuring the government to cut its debt more rapidly means that the Bank will be unable to avoid political pressure from Brown and Co. David Riley, Fitch's co-head of global sovereign ratings, said that among the major economies, the UK was “potentially most at risk” of a downgrade “given that if faced the largest budget adjustment”. But he added that the Britain's current stable rating outlook “reflected our expectation that the UK government will articulate a stronger fiscal consolidation program next year”. As such the forecasts may incorporate policy changes which the Bank may not be able to deliver. Still, King will argue ardently that UK’s AAA rating will not be compromised and that both the Bank and the Treasury have necessary tools to adjust policy in right time.

• See the whole preview BoE Quarterly Inflation Report

Published on  Wed, Nov 11 2009, 10:12 GMT