BOE July Monetary Policy Meeting Preview

WHEN
Thursday 4 July 2013, 12.00 BST
CARNEY'S FIRST MEETING TO BE AN ANTI-CLIMAX
The odds are that new Bank of England governor Mark Carney’s first MPC meeting is going to be an anti-climax, and the consensus expectation is rates will be on hold at 0.50%, and asset purchases will be held at £375bn.The key question is whether Carney will follow previous governor Sir Mervyn King in voting for more QE – a question that won’t be answered until the minutes to July’s policy meeting are released on 17 July.

Incoming economic data suggests that the six members of the Monetary Policy Committee who have previously voted against additional QE will again spurn more easing. This week, services PMI rose to 56.9, the highest since March 2011. This is good news since approximately 75% of the UK’s economic output comes from the services sector. And the composite measure of PMI has been steadily increasing over the last few months. Encouragingly, services, construction and manufacturing PMIs are now in expansionary territory. Additionally, the UK’s infamous double-dip recession has now been revised away by the Office for National Statistics.

But despite the positives, UK economic fundamentals still leave a lot to be desired. Disposable income fell by 2% in the first-quarter of 2013, highlighting that British consumers still face challenges; the UK’s current account deficit also looks precarious, as it unexpectedly widened to 3.6% in the first-quarter of 2013. Further, global events could still derail the UK recovery: the rate cycle, for example, is changing and may continue climbing after Federal Reserve chairman Ben Bernanke suggested that the Fed may taper its asset purchases, perhaps as early as this year(long considered to be the primary punch-bowl for global markets). These concerns will give resolve to the doves on the MPC.

There has been a suggestion that the Bank of England may release a statement after July’s policy meeting. This would be untraditional – the MPC only issues statements in the event of extreme events. Speaking to Live Squawk, BoE staff also dismissed the suggestion, saying that no extraordinary releases will be made. Nevertheless, as expectations are elevated for this MPC meeting (being Carney’s first, and all), traders should not be too surprised by unexpected release of statement.

If any statement is released (and it is still a big ‘if’), it is unlikely to be announcing forward-guidance just yet. The UK chancellor George Osborne has asked governor Carney to consider implementing forward-guidance, and Carney is expected to report back in August, at the release of the next Quarterly Inflation Forecast. Forward guidance has not been discussed in any of the previous MPC meetings, so little is known about the form that the BoE is expected to take (will it be Fed-style? Or will it be more flexible?). Again, all eyes will be on the minutes release to see how these discussions have gotten underway.

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