Bank of England Rate Decision Preview

Data since the last MPC decision

• Mar PPI Input M/M: 1.8% v 1.9%e || Prior revised from 1.7% to 1.9%
• Mar PPI Input Y/Y: 20.6% v 19.3%e || Prior revised from 19.4% to 19.7% (highest since 5/80)
• Mar PPI Output M/M: 0.9% v 0.5%e || Prior revised from 0.3% to 0.5%
• Mar PPI Output Y/Y: 6.2% v 5.6%e || Prior revised from 5.7% to 5.9% (highest since 8/85)
• Mar PPI Output Core M/M: 0.3% v 0.4%e
• Mar PPI Output Core Y/Y: 3.1% v 3.0%e || Prior revised from 3.0% to 3.1%
• Mar RICS House Price Balance: -78.5% v -67.0%e || Prior revised from -64.1% to -65.7% (lowest since records began in January of 1978))
• Mar CPI M/M: 0.4% v 0.6%e
• Mar CPI Y/Y: 2.5% v 2.6%e
• Mar CPI Y/Y Core: 1.2% v 1.3%e
• Mar RPI M/M: 0.3% v 0.5%e
• Mar RPI Y/Y: 3.8% v 3.9%e
• Mar RPI Y/Y Ex-Mortgage: 3.5% v 3.6%
• Mar Claimant Count Rate: 2.5% v 2.5%e
• Mar Jobless Claims Change: -1.2K v -1.8Ke || Prior revised from -2.8K to +0.6K
• Feb Average Earnings Including Bonus: 3.7% v 3.6%e || Prior revised from 3.7% to 3.9%
• Feb Average Earnings Excluding Bonus: 3.8% v 3.7%e
• Apr Rightmove House Prices: M/M -0.1% v 0.8% prior
• Apr Rightmove House Prices: Y/Y 1.3% v 5.0% prior (lowest since 10/05)
• Mar Retail Sales M/M: -0.4% v -0.3%e || Prior revised from 1.0% to 1.1% (lowest since 1/07)
• Mar Retail Sales Y/Y: 4.6% v 4.3%e || Prior revised from 5.5% to 6.3%
• Q1 Advanced GDP Q/Q: 0.4% v 0.4%e
• Q1 Advanced GDP Y/Y: 2.5% v 2.6%e (lowest since Q1 2006)
• Mar Mortgage Approvals: 64K v 66Ke || Prior revised from 73K to 72K (lowest since records began in April of 1993))
• Apr GFK Consumer Confidence: -24 v -20e (lowest since 11/92)
• Apr Nationwide House Prices M/M: -1.1% v -0.5%e || Prior revised from -0.6% to -0.7%
• Apr Nationwide House Prices Y/Y: -1.0% v 0.0%e (lowest since 1/96)
• Apr Manufacturing PMI: 51.0 v 50.8e
• Apr Halifax House Prices M/M: -1.3% v -0.6%e
• Apr Halifax House Prices Y/Y: -0.9% v -0.8%e (lowest since records began in December of 1992)
• Apr Construction PMI 46.1 v 47.0e
• Apr Services PMI: 50.4 v 51.7e
• Apr Nationwide Consumer Confidence: 70 v 74e (lowest since records began in May of 2004)
• Mar Industrial Production: M/M -0.5% v -0.1%e
• Mar Industrial Production: Y/Y 0.2% v 0.8%e || Prior revised from 1.3% to 1.2%
• Mar Manufacturing Production M/M: -0.5% v 0.0%e
• Mar Manufacturing Production Y/Y: 0.6% v 1.2%e

BOE speakers since the last MPC decision

BOE's Gieve:

• UK is not in same position as US in regards to recession.
• UK manufacturing sector is performing well
• BoE will continue to take liquidity easing steps to unfreeze markets.

BOE's Bean:

• UK CPI likely to exceed 3% in 2H08
• Weaker GBP should help offset contractionary impact of credit market turmoil
• Stimulus from GBP fall 'roughly equivalent' to rate cut of 3%

BOE's Besley:

• MPC Should not try to offset downside economic shocks; should focus on price stability
• New loan facility should aid MPC's CPI focus
• There is little to suggest last year's pick-up in inflation led to 2nd round effects

BoE's Sentance:

• Falling GBP aggravates inflationary pressures through import prices and export demand
• GBP weakness is unlikely to prove temporary and is pushing up inflation BoE's Sentance: There is evidence that the UK housing market is "weakening sharply."
• Meeting inflation target will need relatively weak growth in 2008, 2009.
• Oil, GBP, PPI pose upside CPI pressures, and need to monitor wage reaction to CPI closely.

BOE's King:

• Inflation could hit 3% or higher over the next year
• Too early to say if BOE need additional resources to maintain financial stability

BOE's Blanchflower:

• Not too late to avoid UK recession, but if you wait too long, it may become too late
• Recent data is a worry; oil, food prices 'look like bubbles'
• Concerned Libor rate is above policy rate
• BOE's Blanchflower: UK labor market is "turning," BoE should loosen policy
• Needs to look through short-term CPI outlook, not too worried about rising CPI expectations.
• The real risk to the UK is CPI falling below 1%.
• Must act aggressively to avoid UK recession, monetary policy is restrictive, easing slowly will mean more rate cuts will be required.
• Medium-term downside risks to inflation outweigh upside risks, greater than Feb report.

The Shadow MPC’s Call

The Times' shadow MPC voted 5-4 to leave interest rates on hold ahead of this week's Bank of England policy-setting meeting. Two of the Shadow MPC members argued that a 50bps rate cut is needed to head off a sharp recession. Amid the views of those that voted to keep rates on hold were the views that the £50B liquidity scheme has lessened the need for rate cuts, the bank could jeopardize its credibility by cutting rates when policy seems so ineffective, and, of course, general concern about uncomfortably high inflation. A recent survey of 60 economists showed that 8.3% expect a 25bps cut at this week's meeting, while the rest expect the BOE to leave rates unchanged at 5.00%.

Conclusion

The Bank of England is in a tough place right now as the MPC is split for obvious reasons. The BOE has had a split vote at every meeting this year, with the split seeming to grow as time progresses. The BOE is not known for making back-to-back policy moves, which, along with the MPC’s split view has led most economists to predict that the BOE will hold rates this month, and maintain a “wait and see” stance.

Despite this many analysts are forecasting a BOE rate cut within the next few months. The question today is, will the BOE step up to the plate and cut rates in the light of some of the weak economic data over the past few days, or will the BOE continue to monitor inflation before taking action? I say why wait?