BoE prepared and ready to act?

With the minutes of the latest Monetary Policy Committee meeting due this Wednesday, markets will be looking to gage the Bank of England’s view on recent macroeconomic developments

Unsurprisingly at its latest rate-setting meeting on the 10th of this month, the Bank of England’s (BoE’s) monetary policy committee opted for keeping both its key rate as well as the size of its asset repurchase programme unchanged, at 0.5% and £275bn respectively.

That is believed to be because although many indicators are at the moment pointing south, whether that be activity based or price related indicators, at its previous meeting it specifically stated that the increase in its asset repurchase plan was meant to last for four months.

Analysts therefore seem to agree that a sudden change of tack would have looked a tad awkward. Furthermore, the BoE surely wanted sufficient time to allow events in the Eurozone to unfold, even if only after taking out some insurance beforehand.

Thus, the Bank’s policy setters will probably not make any radical changes to the text of the last meeting’s minutes this Wednesday, although they will likely want to somehow acknowledge the now greater downside risks to the British economy.

Similarly, there have been some reports out in the past fortnight as regards contingency planning at all levels of government to take into account the events in the Eurozone; but it is not at all clear if they will want to put too much emphasis on this beyond indicating that they always try to anticipate all possible scenarios.

Having said that, there are those who have argued in the recent past, rightly or wrongly, that BoE governor Mervyn King was caught somewhat unawares earlier this year by the rapid worsening in the Eurozone crisis - first Greece fell further out of favour with the markets and then Italy suddenly lost the markets’ credibility entirely. Furthermore, the more realistic the Bank’s diagnosis is the greater confidence that it will lead to amongst economic agents.

In any case, the fact is that there are economists who believe that it is only a matter of time before the central bank opts for a further increase in its policy of quantitative easing.

As well, and somewhat intriguingly, more than just a few observers and analysts are of the opinion that the European Central Bank ought to, and eventually will have to,  show its willingness to go ‘all the way’ in buying Italian debt.

That is to say, those analysts expect that the Eurozone’s monetary authority will eventually have to engage in quantitative easing itself. Would this lead to unwanted strength in sterling? At least in the very short-term that would not seem to be a concern for the Monetary Policy Committee, nor in the mid-term.  

Finally, and possibly also impinging on the BoE’s deliberations, the recent ‘upward surprises’ in US economic indicators is of great importance. Despite that, the Eurozone’s woes could easily douse the hopes which that data has inspired.