Monetary stimulus unlikely for now
ROLL up roll up, it’s 2013 and the Bank of England is due to meet for the first time this year, with an announcement due on Thursday. It does so with the FTSE 100 back over 6,000 for the first time since July 2011, and 10 year gilt yields back above 2 per cent for the first time in eight months.
To be fair, financial markets have been boosted to some extent by the fiscal cliff deal, which mostly avoided any major tax increases, and benign US jobs data. But the UK has also had some better news of its own. The most recent PMI numbers for manufacturing suggested stabilisation in the sector, and the latest Bank of England survey showed that credit may be starting to flow again.
But the news isn’t all good. Services PMI hit a 44 month low in December, and most economists are now talking about a 0.1 or 0.2 per cent contraction for the UK economy in the last three months of 2012. Friday’s industrial production figures will be instructive and we’ll know for sure on 25 January, when the first GDP estimates are released.
Against this backdrop, don’t expect too much from the Bank’s Monetary Policy Committee this week. However, if there are signs that the weak economy is continuing into the current quarter, it could consider more quantitative easing in February. But, for now, rates will stay at their record 0.5 per cent low, where they’ve been for four years, and asset purchases will remain at £375bn. It’s likely that QE will remain paused for two key reasons.
First, there are encouraging signs that credit easing through the Funding for Lending scheme is finally starting to see money trickle through the system. A high net balance of lenders said that they both increased credit availability over the past three months and expect to make more household and corporate credit available over the next quarter.
Secondly, there’s still a good chance that inflation will be heading higher over the short term, with some economist believing it will be back over 3 per cent. It’s not the ideal scenario in which to advocate further stimulus, though real household pay will continue to be squeezed regardless.
So in the next few weeks, we may well see headlines screaming about triple dip recessions but no immediate action from the Bank of England. That could pile more pressure on the chancellor’s deficit target, which in turn means gilt yields have room to head higher.
Ross Westgate co-hosts Worldwide Exchange daily from London, and anchors Strictly Money on CNBC.