In regards to the potential imminent threat of a triple-dip
recession in the United Kingdom, the Bank of England officials (
) 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
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