–BOE Seen On Hold – Case For Mulling Preannouncing Feb QE Extension
–G10 CB Liquidity Moves Not Seen Impacting On BOE MPC Decision

By David Thomas

LONDON (MNI) – Recent policy signals coming from the Bank of
England’s Monetary Policy Committee suggest that the inevitable decision
to extend quantitative easing will not be officially announced until
early in the New Year.

The BOE MPC is due to announce its decision on Bank Rate and QE at
1200GMT Thursday.

Bank of England Governor Mervyn King made it clear at his Inflation
Report press conference on November 16 that he wants to be more sure
that inflation is indeed going to start falling sharply – in line with
the BOE forecast – before announcing new gilt purchase plans.

“I think it is actually rather important that we, you know, see
whether inflation does come down. We’ll be able to judge these things
every month, and no doubt, as information comes in, we can refine our
opinion. But I think what’s important is not to see this in any context
of fine-tuning. We cannot possibly do that. Certainly, in normal
circumstances it would be a mistake to do it, but if there was ever a
time when you might be tempted to do fine-tuning, this isn’t one of
them. So the big picture is what matters.”

Going into the December meeting, the MPC ought to be quite a bit
more confident that the inflation rate will in fact start to fall. The
Autumn Statement contained no nasty VAT or excise duty surprises and
there will be no hike in fuel duty next year. Rises in public transport
tariffs will also be officially limited.

Commodity prices also seem to be coming off the boil, thanks to
slowing growth in the big BRIC consuming economies. Although the WTI oil
price has been rising over the past few months, Brent is higher too but
shy of the recent Summer highs.

While funding strains and the threat of a full-blown credit crunch
would wipe any lingering inflation concerns from the MPC’s mind, a good
result from this Friday’s summit would reduce the case for more
precipitate action.

Expanding QE faces other constraints though –

BOE Executive Director Markets Paul Fisher has advised the
committee that purchasing gilts at a pace much above the present
stg20bn-plus per month runs a real risk of a ‘disorderly’ auction – i.e.
an uncovered QE auction – the last thing the BOE needs in the present
fragile market situation. That much came out of his recent meeting with
the Treasury Select Committee.

As he recently told The Sunday Times –

“We’re buying at the right sort of rate the market can supply.”

Cover at recent auctions has hardly been extravagant – although
the most recent results have certainly been well cushioned i.e., in the
1.8 area.

JP Morgan’s Allan Monks says that comments from the governor and
other officials have effectively “deactivated the meetings between now
and January”.

Waiting until then will allow the committee to be sure the rate of
inflation is coming down and will allow them to keep their gilt
purchases at a pace the market can digest.

The coordinated action taken by what used to be called G10 central
banks on Nov 30 to try and improve the access of funding-constrained
euro zone banks’ to US dollar liquidity probably doesn’t mean a change
in how the BOE’s MPC approaches the question of extending QE.

The new swap accord allows for non-dollar swap arrangements,
including the supply of sterling liquidity, should it be needed. The BOE
reinforced the message that the central bank is committed to taking
“appropriate measures to maintain UK monetary and financial stability”
when it launched a new ‘Extended Collateral Term Repo’ on Tuesday.

Similarly, the central bank actions on Nov 30 had as their aim “to
ease strains in financial markets and thereby mitigate the effects of
such strains on the supply of credit to households and businesses and so
help foster economic activity”.

What it did clearly point up is that the world’s central banks are
back in their post Lehman’s 2008 vintage fire-fighting mode.

These liquidity operations may obviate the need to get more urgent
on QE – but is clear that the central banks also see the need to push a
lot more down the ‘reassurance channel’ at the moment.

That said, pre-announcing the February QE extension may not achieve
much in terms of announcement effect, given that the BOE has already
pretty much inked that into market expectations.

But the BOE chief has made very clear that he is a keen
international collaborator at the moment.

The governor told journalists on Dec 1 at his Financial Stability
Report press conference that he had been very much the initiator of the
central bank moves in his role of head of the Economic Consultative
Committee (or what used to be known as the G10):

He continued:

“In our discussions on the current problem, this seemed to be a
sensible way forward. We are keen to emphasize that we are working very
closely together. We see each other extremely frequently and most
important of all we trust each other,” he said.

But coordination can take different forms.

Another important consideration is that the Bank may well feel that
it should leave the stage free on Thursday for the European Central Bank
to make some positive headlines. Market expectations are building in a
quarter-point cut and an extension of its fixed-rate, repo programme – a
taster for what the ECB’s may be ready to do should EU leaders agree a
substantial crisis-resolution package on Friday.

–London newsroom: 4420 7 862 7492; email: ukeditorial@marketnews.com

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