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PREVIEW: BOE Rate Decision

Thu, Feb 4 2010, 10:13 GMT
by RANsquawk Research Team

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• All but one economist from the market consensus expect the APF target to be left unchanged at GBP 200bln
• A weak GDP reading and soft broader money supply growth could encourage further easing, but a pick up in headline CPI would be an argument against
• Likely to be a split decision

The MPC are almost certain to keep the benchmark rate at 0.5% today. Consequently, the focus will be firmly on whether policymakers choose to extend the Asset Purchase Facility (APF) given its recent expiry.

So far, QE has had a somewhat disappointing impact on the UK economy, given the large outlay (15% of GDP), and especially when taking in to account the UK only grew 0.1% in Q4 in comparison to 0.7% growth in Germany. More worrying, however, is the stagnation in the growth of broader money supply. This was a key aim of QE, as outlined by the MPC in the May 2009 Inflation report, but clearly the program has not had the desired effect. Despite this, QE has made a positive contribution towards improving overall credit conditions for UK firms and has so far not led to a problematic increase in inflation, as portrayed by the current yield on the inflation linked gilt, even after the CPI Y/Y headline crept to 2.9% in Dec.

It is reasonable to assume the MPC decision will be divided. On the one hand, there will be those who are worried that longer term funding costs will edge higher if the APF is not extended. This would be a risky manoeuvre and could stifle the economic recovery, or at best put it at risk. In contrast, some policy makers will be worried that ploughing more money in to the system will not have a material impact, and worse still, could lead to increased inflationary pressures. That said, the BOE has warned for some time that inflation would spike higher this year given the rise in oil prices following the sharp decline in Dec. 2008 and the reinstatement of the 17.5% VAT rate. However, at the same time the BOE has indicated that it was confident that inflation would fall back in Q2, but the fear is that it may not fall as much as they initially expected.

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Published on  Thu, Feb 4 2010, 10:14 GMT

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