Triple-dip recession looms in UK as BOE mulls response

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In regards to the potential imminent threat of a triple-dip recession in the United Kingdom, the Bank of England officials ( BOE ) will likely discuss and posture today as a looming change of governor overshadows the remainder of Mervyn King's term. While the calendar still reads five months before Mark Carney takes over, the Monetary Policy Committee is awaiting results of its credit-boosting program after stymieing bond purchases and signaling no additional interest-rate cuts for now. It is this climate that policy makers are addressing and assigning their new forecasts before their February 7 decision.

"There is that element of 'wait-and-see' about things, and that's not particularly to the advantage of the economic situation." noted Neil Mackinnon, a Global Macro Strategist at VTB Capital and a former U.K. Treasury official. "It becomes an excuse to wait until the new governor is in place. There is always the danger of policy paralysis."

As such, economists predict the MPC will leave its quantitative-easing program and benchmark rate unchanged next week - MPC members' stability may reflect acute concerns that QE has indeed held a mitigated impact, while officials have turned their focus to the success of the Funding for Lending Scheme. Recent policy makers' remarks are also increasingly addressing the next governorship and a potential revamp of their mandate in a debate sparked by Carney, who will notably become the first foreigner to run the Bank of England.

"The changeover has certainly slowed things down a little." wrote Jens Larsen, chief European economist at RBC Capital Markets in London and a former Bank of England official. "Everyone is angling around for this great new idea that's going to solve the problems, and I don't think it's going to happen."

At the precipice that emphasizes the clash of old and new, the Bank of England's meeting and decision next week will take place just as Carney makes his first public appearance in the U.K. in connection with his newfound role. Moreover, he will testify to lawmakers who have said they will ask him whether the existing policy framework is the right one for the U.K. after barely any economic growth in the past four years.

Unfortunately, the weakness of the economy may loom during both sessions after data last week showed gross domestic product fell -0.3% in the fourth quarter, more than economists had forecasted previously. While the American, German, and Canadian economies are back above their pre-recession levels, the United Kingdom has recovered only approximately half of the output lost during its fabled 2008-2009 recession.

In response to the downturn, the Bank of England cut its key rate to a record low in March 2009 and started buying government bonds, accumulating nearly £375B. The BOE's latest measure is the FLS, which provides cheaper funding to banks in return for lending to companies and consumers. A central bank survey this month indicated mixed results. While mortgage availability rose "significantly" in the fourth quarter, an improvement in corporate lending conditions was more pronounced for large firms than small ones.

King has signaled the BOE is still awaiting the full impact of the program, saying on Jan. 22 that lending conditions should improve further as it "kicks in." All 29 economists who have so far responded in a Bloomberg survey forecast that QE will be maintained on Feb. 7. The MPC will also keep the key rate at 0.5 percent, according to a separate poll.
"The central bank may have exhausted its current QE program, and they've moved on to the FLS as a way to break the liquidity trap," Mackinnon said. "However, they're up against it. The wait for the transition in monetary policy could create unnecessary uncertainty."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Forex and Currencies

Referenced Stocks: BOE

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