LONDON (MNI) – Strong survey data as well as renewed signs of
stickiness in UK inflation have persuaded most of the Monetary Policy
Committee of the Bank of England to look through what promise to be
some very weak official data for activity in Q1.

Minutes for the MPC’s April meeting showed that the committee
was even prepared to disregard a technical recession in H1 this year –
the rational being that weak construction output through January and
February would depress the Q1 number while the Royal Jubilee in June
would hurt Q2.

Adam Posen’s decision to switch his vote and back unchanged QE
seems a clear sign that policy thinking on the MPC had shifted, given
his support for a further stg25bn at the March meeting.

Until now a strong advocate of further QE, Posen has always
said that a failure of inflation to fall back would prompt him to
reassess his stance.

The ‘plateauing’ trend in core CPI seen over Q1 rather than the
fall that had been forecast had been “weighing” on his mind, he said.

“What is more challenging to my analysis, and more concerning for
the economy, is that core inflation has plateaued for the last three
months rather than trending down.”

Posen’s doubts are shared by the whole of the committee even the
one remaining vote for more QE at the April meeting, David Miles, whose
vote was “finely balanced”.

BOE Deputy Governor Paul Tucker seemed to be speaking for the whole
of the committee when he told corporate treasurers on Tuesday morning
that –

“Though it has fallen significantly over the past six months, from
over 5% to 3.5% on yesterday’s reading, it remains uncomfortably above
target. The MPC will guide inflation back to target in the medium term,
but in the near term there is considerable uncertainty about the path
that it will follow.”

Tucker even worried that headline CPI could stay above 3% into H2.

Compared with the MPC’s February forecast inflation stands at 3.5%
rather than 3.35%. The latest upside CPI news was enough to make the MPC
sceptical of what looks set to be flattish GDP data through H1, even
though this will be markedly short of the 0.5% Q1 growth forecast
issued by the BOE in February.

“The MPC will be focused mainly not on headline growth but rather
on indicators of underlying activity,” Tucker said.

The latter, he noted, had left the BOE’s February forecast of a
modest recovery (PMIs and the REC/KPMG jobs report were particularly
cited in the minutes) ‘broadly on track’. Other unofficial data have
also suggested that the economy is bouncing back from its mid-2011
doldrums. The BCC Q1 survey was also surprisingly optimistic while the
BOE’s own regional agents report was fairly upbeat also.

Flash Q1 GDP data out next week could even show a slight fall, as
the minutes conceded. Little wonder then that the BOE wanted to get the
message out that consumers and businesses shouldn’t base their spending
and investment plans on the idea that recession is back.

“…it was possible that the ONS would report further contractions
in output in the first and second quarters. That might further damage
household and business confidence, even if the underlying pace of
economic expansion were stronger”.

The fact is that the risks to growth have hardly gone away. As the
MPC itself listed them – growth may not confirm the bullish surveys, the
pace of fiscal consolidation is easing but it will stay a drag on
activity for year and higher inflation itself will delay the rise
in real disposable income which the MPC has been hoping for.

All this is set against the backdrop of banks which are busy
deleveraging and consumers who are bolstering their savings and a euro
zone where the effect of the LTRO magic is starting to wear off. Another
LTRO looks unlikely. Concerns on inflation in Germany and Netherlands
dominated ECB President Mario Draghi’s last press conference and
prompted a hawkish warning from him.

Around the world central banks are becoming more antsy about
inflation.

QE3 in the US, for example, is now looking off the agenda as the
labour market perks up, even if the strength of this is not enough to
keep Fed Chairman Ben Bernanke happy, it is enough to stay the hand of
many on the FOMC.

The BOE’s commitment to its inflation target has been questioned in
the investment banking milieu in the recent past but it seemed to manage
its inflation spike of recent years without hurting its credibility too
much, although it would be fair to say it is now seen as having a more
dovish reaction function than the ECB, maybe even the Fed. Displaying
its hawkish plumage while it can, could be an adept communications move.

Should the survey data start to converge more with the weak
GDP numbers, the MPC will have some dry ammunition to hand.

–London newsroom: 4420 7862 7492; email:
dthomas@marketnews.com/wwilkes@marketnews.com

[TOPICS: M$$BE$]