LONDON (MNI) – Contracting first quarter growth, rising mortgage
rates, higher sterling and renewed euro area turbulence, offset by
concerns over sticky inflation, make the outturn of the May 9 and 10
Bank of England Monetary Policy Committee meeting a close call but
analysts, on balance, expect policy will be left on hold.

At the April meeting, only one MPC member voted for more
quantitative easing and the talk was about inflation concerns and how
official data were exaggerating economic weakness. Most analysts think
the MPC will not reverse its policy stance so rapidly that it sanctions
further QE this month but they do not rule it out.

Even if the MPC does sit tight in May, another bout of euro area
jitters, leading to a marked rise in bank funding costs, would likely
re-trigger QE in coming months, analysts say.

A Market News poll of 34 economists found seven expected further QE
at the May meeting. Of those predicting more QE, three forecast a
further Stg25 billion and four a further Stg50 billion, while
one-in-three expected more QE by the end of the year.

The April MPC minutes showed some members placing greater weight on
inflation concerns and the man who spearheaded the second wave of QE,
Adam Posen, dropping his call to extend it.

“There was a greater chance than before that above-target inflation
would persist into the medium term, whether because of elevated external
price pressures, a rebuilding of margins or a rise in costs,” the
minutes said.

“There was always going to a point where, if inflation didn’t fall
the way they expected, they were going to have to place more emphasis on
it … It seemed they reached that point last month,” Simon Hayes, Chief
UK Economist at Barclays, says.

“It would be a bit odd to reverse that one month later,” Hayes
adds, predicting unchanged policy this month.

Hayes says, however, that the MPC could sanction more QE as early
as July or August if market conditions deteriorate and bank funding
costs rise, while further down the line more QE would be approved if it
is clear the recovery has come in much weaker than expected.

Peter Dixon, Chief UK Economist at Commerzbank, is another who
doesn’t expect the MPC to sanction further QE this month but he does
anticipate it in response to the next significant deterioration in
market conditions. As a result Dixon declines to predict which month
will actually see the next QE increase.

Brian Hilliard, Director of Economic Research at Societe Generale,
also predicts unchanged policy at the May meeting but says markets have
been premature in assuming there will be no further QE.

Hilliard says the big news at the April MPC meeting was Posen was
not backing more QE and if even Posen is worrying about sticky inflation
then his colleagues such as Chief Economist Spencer Dale and Deputy
Governor Paul Tucker will also being doing so.

While the majority on the MPC will be minded to sit tight because
of inflation concerns In May, they will also have to factor in a soft
growth outlook.

While the MPC in the April minutes set out reasons not to take the
Q1 GDP data at face value, the subsequent published data were still
strikingly weak, showing a 0.2% fall on the quarter and widespread

Even stripping out energy, construction and other volatile
components analysts point out the data showed, at best, a low positive
underlying growth rate, of 0.1% to 0.3% on the quarter depending on the
method used. The figures still do not, however, suggest the economy is
heading back into another deep recession.

“There is a lot of debate about how much you read into the Q1 GDP,”
says Nick Bate, UK economist at Bank of America Merrill Lynch but he
says that even if you take the National Statistics data at face value
they “don’t suggest a new downtrend in the economy.”

A patchy quarter up/quarter down pattern has been broken by two
successive quarters of negative growth, triggering headlines about a
double dip recession, but the MPC will look through this.

Nevertheless, the MPC will have the central projections of their
May Inflation Report at this month’s meeting and members are likely to
be looking at lower near term growth forecasts.

While growth is troublingly weak, the MPC also has plenty of
inflation concerns to worry about.

Bate points out input costs have risen pretty significantly and
with unit wage costs higher there has been compression of firms’
margins, which is troubling for the MPC.

While oil prices have eased back, food prices, with harvests hit by
unseasonably dry then wet weather, pose upside risks.

–Sterling Weighs On Inflation

On the other side of the coin, a resurgent sterling is pushing down
on inflation.

The sterling broad effective exchange rate index, the BOE’s own
measure, shows that on May 3 the currency was up 2.3% on the month, up
2.7% since the start of the year and up 2.6% on a 15 day average
compared to the run up to the BOE’s February quarterly Inflation Report.

Until this latest rise, sterling had drifted to the margins of the
policy debate, having been broadly stable since the start of 2009 after
a hefty depreciation over the 18 months prior to that.

The downward impact on inflation of the latest rise, however, will
not be great. Hayes says the ready reckoner at the Bank was 10 to 1,
with a 10% rise in trade weighted sterling feeding through to one
percentage point off inflation.

On that basis, the latest move would knock a little less than 0.3
percentage point off CPI over a two year forecast horizon in comparison
to the February Inflation Report forecast.

Hayes highlights, however, the risk of double counting with
sterling strength due to the latest euro area weakness, with the latter
showing up elsewhere in the BOE forecasts and pushing down on export

Sterling’s rise is unlikely to be a game change but with the
February Inflation Report showing a marginally greater chance of
inflation being above than below target, the updated BOE forecasts are
likely to leave the door open to more QE.

All of which makes it unsurprising analysts are divided over the
outturn of the May meeting and that they are highlighting the risks
around their policy calls.

–London bureau: +4420 7862 7491; email: