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September 8th 2011:  Preview - Bank of England will consider further quantitative easing

 

As well as the ECB, The Bank of England will also meet on Thursday. There is no doubt that the bank faces a gloomy outlook with the UK economy continuing to deteriorate. The most troubling recent evidence was the sharpest decline for 10 years in the PMI services-sector index for August as it fell to 51.1 from 55.4 previously.

The manufacturing PMI index has been below 50 for two months and the housing-sector evidence has also been weak with the Halifax reporting a 1.2% price drop for August. Money supply indicators also continue to signal alarm.

In this environment, the MPC will discuss the possibility of further policy easing and its certain that Posen will continue to argue the case for more bond purchases. A change in interest rates is unlikely to be considered at this meeting.

The majority of members will want to see further evidence of economic trends before making such a commitment, especially as the effectiveness will be very doubtful given that long-term interest rates are already extremely low given the inflation profile.  Expanding policy at a time when inflation is still above 4% would also further undermine the bank’s credibility.

The most likely outcome is a wait and see approach with no change in interest rates or quantitative easing with Sterling unlikely to gain much support.  There is a round a 15% chance that the bank will increase quantitative easing today in which case GBP/USD is likely to slump to the 1.5750 area.

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