–Euro Crisis Threat To UK Banks Remains Central Concern Of MPC
–Rising Oil Prices, Utility Bills Keep Squeeze On Consumption

By David Thomas

LONDON (MNI) – More lively UK industrial production data and
business surveys do not seem to be doing much to interrupt the Bank of
England Monetary Policy Committee’s steady drift towards an extension of
its QE programme.

Minutes for the September meeting of the Committee, when July
output numbers and the ebullient CIPS PMI service sector survey were
already factored in, show MPC members still very much looking a gift
horse in the mouth.

“The robust July Index of Production numbers would require further
study but, alongside the monthly indicators of consumption and the
surveys of output in August, they suggested some moderate underlying
expansion,” the minutes state.

The MPC has welcomed signs of green shoots in the past only to have
their recovery hopes cruelly dashed and have been left scarred by the

The minutes duly point to the darker side of the recent more
buoyant indicators – “the more forward-looking components of the business
surveys were weaker, and the rise in energy prices would mean that the
squeeze on real household incomes would not ease further in the short

The latter had been a key pillar of the MPC’s recovery hopes.
Thanks to the recent Mideast-fuelled surge in oil prices, higher food
prices and looming utility bill hikes too, consumption will not be a
driver of growth anytime soon.

Oil prices as measured by WTI rose 13% between early August and
early September.

The MPC remains as fixated as ever on the euro zone crisis and is
not putting any great store in the recent bond-buying plan from the
European Central Bank or any other promising political initiatives to
resolve the situation.

“Very substantial risks were likely to remain for some time to
come, which if they crystallised, could have a considerable impact on
the stability of the global banking system”.

The euro zone crisis and, more importantly, its threat to the UK
banking system was the catalyst for the last two tranches of QE from the
BOE. The minutes make clear that the risk of a euro zone meltdown
remains at the forefront of the BOE concerns.

“Even if a disorderly outcome were avoided, it was probable that
the threat of such an event would continue to weigh on domestic economic
activity for some time”.

These concerns are qualifying hopes for the BOE/UK Treasury’s
Funding for Lending Scheme which could provide up to stg80bn of cheap
funding to the banks for lending to home buyers and small firms. Some
members of the Committee (notably BOE Chief Economist Spencer Dale and
Ben Broadbent) had seen the launch of the FLS as a key reason not to
back the stg50bn expansion of QE in July.

While the MPC stressed again that the scheme remains “in its early
stages” – it cautions that, “heightened uncertainty, stemming especially
from the euro area, and risk aversion on the part of households and
business might limit the demand for credit…”

The Committee notes it makes more sense to look at lending rates
rather than credit volumes, given that the FLS was only rolled out at
the start of August. The minutes show members taking heart from some
reductions by some banks in some of their lending products.

“…It was likely to be some while before there would be
drawdowns on a significant scale,” the minutes stated.

That kind of scepticism around the FLS could undermine what had
been a key argument of the hawks against the further QE which was
launched in July.

Identifying the factions in the latest set of minutes is to some
degree more straightforward than in previous editions and also suggests
the momentum towards further QE is hardly even slowing.

The one member described as “more finely balanced” on the argument
that QE should be left unchanged in September looks very like the dovish
David Miles, his fellow dove Adam Posen having departed the committee at
the end of August. The bigger question over where the bulk of the
committee lies is more opaque.

“For most members this decision was relatively straightforward,
although some of these members felt that additional stimulus was more
likely than not to be needed in due course, others saw the risks to
inflation in the medium term as being more balanced around the target”.

Certainly, the more hawkish BOE Chief Economist Spencer Dale and
Ben Broadbent could well belong to the latter cabal. Given the
prevailing concerns on the pace of inflation’s downward trajectory,
others could have joined them.

But given that Miles also clearly has the support of at least a
couple of MPC members, prospects for further QE later this year still
look set fair.

Like the Federal Reserve before it, the majority of the BOE MPC
seems to be thinking that even if there is moderate underlying expansion
out there – and that is surely moot – it still just isn’t enough.

–London Newsroom: +4420 7862 7492; email: dthomas@marketnews.com