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The UK data this week has largely served to muddy the water surrounding next week’s MPC meeting, where the Bank of England will be debating the merits of further quantitative easing. In the wake of the Q4 GDP numbers (which fell 0.2% QoQ), the immediate fear was a return to recession, given that the last quarter of negative growth (Q4-‘10) was easier to dismiss as the result of one-off factors. This morning, services PMI for Jan. has rebounded to the strongest reading for ten months, surprising to the upside for the third consecutive month in a row. A similar pattern has been seen in the manufacturing series, although in absolute terms it remains lower than the services series.
As of last Friday, the Bank of England had GBP 6.4bln of purchases remaining to be implemented from the additional GBP 75bln announced. Our blog of last month, looking at the impact of QE so far, suggested it had been less than the first round, naturally adjusting for the lower size of purchases in this second bout (see ‘The inefficiency of QE2 in the UK’). The tentative evidence since then suggests little has changed. The premium of Gilts over German paper has been on a widening trend (just as much down to the safe-haven appeal of German bonds). Meanwhile, at the other end of the interest rate curve, we’ve seen sterling Libor spreads over overnight swaps (the broad benchmark of banking sector stress) widening, in contrast to the narrowing seen in the US and more so for the eurozone (largely thanks to ECB’s 3-yr repos). Furthermore, the BoE’s own data on effective interest rates (those charged to households and companies) shows only a modest fall between October and December. Overall, given the ongoing uncertainties about the economy, and some better signs on inflation since the November Inflation Report, we suspect that the BoE will sanction more QE next week (at most GBP 50bln).
