06‏/01‏/2009

GBPUSD: BOE to Remain On Hold This Week

The Bank of England's Monetary Policy Committee gathers today for its regular monthly rate meeting with an announcement due tomorrow.

Look for an unchanged verdict with the bank rate at 5.00% in line with market expectations as recent economic data cast a serious shadow over the near term growth outlook.

On the flipside, inflationary pressure has continued to build and has been a major cause for concern for many in the committee - so much so that many members considered the merits of a rate hike at the June meeting.

Of course, when faced with such data it is only a natural reaction to consider such course of action though the key here is to understand that while some members may have shown willingness to raise rates, their ability is severely constrained.

This feature has only intensified since the June meeting with this week's BCC Quarterly Economic Survey coming in on the disastrous side while both the services and manufacturing PMI have signalled such a downturn for a few months now.

Indeed, the services PMI is currently at 47.1 and has in the past been associated with 50bp rate cuts (such as in 2001).

The MPC is likely to be feeling the same pressure to cut though with the added worry about further elevating the inflation profile.

That said, King and others have highlighted that the current economic slowdown is likely to act as a damper on CPI pressures further out and that the current burst of pressure is essentially shortterm and one-off in nature.

Survey releases that are most likely to be followed by the MPC are the RICS house price balance, BCC QES - particularly the services part and the CBI's distributive trades survey. Since the start of 2008, all three of these have taken a significant turn for the worse with the breakdown of the BCC survey showing heightened concerns with cashflow in both manufacturing and services.

The outlook for profitability was equally as worrying with the survey highlighting the very real risk of a recession.

Against a background of easing quarterly hard economic data and a rise in the claimant count, a rate rise at this week's meeting can safely be ruled out - and probably for the rest of the year.

Maintain the call for a likely flat profile through 2008 with the next move seen as downwards in H1 2009.

Moving to the housing market, this is likely to be another hot topic of discussion with the June Halifax house price index due for release this week (most likely tomorrow morning given the tendency for lenders to release around key events).

Another hefty monthly fall is on the cards though perhaps not as weak as the -2.4% m/m outcome for May.

Consumer confidence has plummeted recently and renewed concerns about the banking sector will probably continue to weigh on the availability of credit, even if intentions to enter into the housing market remain intact.

These are testing times for the Central Bank with arch dove Blanchflower likely to gain more support in the months ahead from his colleagues.

The inflation story is well known while the fallout on growth is still a matter of debate in terms of its severity.

The risks are therefore skewed towards a rate cut in Q1 2009 and possibly earlier if hard economic data follow dismal indications from surveys.

06‏/01‏/2009

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