Investment Research — General Market Conditions 3 April 2013 preview New MPC remit will not change policy at this meeting

We expect the Bank of England (BoE) to remain on hold at Thursday’s Monetary Danske Cons. Last Policy Committee (MPC) meeting (13:00 CET). Bank Rate 0.50% 0.50% 0.50% On an aggregate level, not much has changed in the outlook for the recovery of UK APF 375bn 375bn 375bn output with little news in the macroeconomic data. The January numbers for industrial Source: Bloomberg, Danske Bank Markets activity were significantly weaker than expected, declining 1.2% m/m, while the

Index of Services, on the other hand, increased by 0.8%.The March manufacturing Trade weighted Sterling index PMI confirmed the weak February reading at 48.3, but given the strength in the much more crucial service PMI in February, we have to wait for the updated reading on Thursday to draw any firmer conclusions.

The latest minutes were slightly more hawkish than expected with the signals of a concern over the depreciation of Sterling. The MPC restated its view of looking through a temporary above-target inflation – also the inflationary consequences generated from the recent movements in the exchange rate insofar as those

movements reflected real factors, but ‘prospective movements in the exchange rate Source: Macrobond, Danske Bank Markets that reflected perceptions that monetary policy would remain excessively loose, or

that the MPC’s commitment to meeting the inflation target in the medium term was diminished, would be a different matter.’ UK CPI above target for a long time

Altogether, the minutes did not alter the present stance within the MPC. Governor 6% Feb Inflation 6% King was once again in the minority, as the MPC voted 6-3 in maintaining the present 5% report 5% forecast policy. 4% 4% 3% 3% We do not think the remit change (see details in Box 1 on next page) will affect policy 2% 2% 1% 1% or communication at this meeting. Note that no members have yet made any 0% 0% comments since the publication of the amended remit. Given that the MPC operates 07 09 11 13 15

under ‘one man – one vote’, any policy choice that requires co-ordination (e.g. a Source: Macrobond, Danske Bank Markets commitment to specified policy path or intermediate thresholds) probably requires some sort of prior arrangement within the MPC. We see that this is most likely to happen after the arrival of incoming governor . Past months’ changes in SONIA curve

With concerns on Sterling movements and the MPC not yet internally aligned on the 0.70% 0.70% amended remit, we do not expect the MPC to change its stance at this meeting. The 0.60% 0.60% 0.50% 0.50% case for further asset purchases is still present but we would look to the May meeting 0.40% 0.40% (when new forecasts from the Inflation Report will be available) or even more likely 0.30% 0.30% the August meeting (with both Mark Carney in the chair and the discussions of the 0.20% 0.20% 0.10% 0.10% effectiveness of forward guidance in place) for possible increases to the asset Apr Sep Feb Jul Dec May 2013 2013 2014 2014 2014 2015 purchase programme (APF). BoE dates SONIA 04/03/2013 Bank Rate 04/02/2013 A more probable change could come in the setup of FLS targeted at small and Source: Danske Bank Markets medium-sized companies (SMEs) as proclaimed in Chancellor Osborne’s budget speech two weeks ago.

Analyst Anders Vestergård Fischer +45 45 13 66 41 [email protected]

Important disclosures and certifications are contained from page 4 of this report. www.danskeresearch.com

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Box 1: Details of the amended MPC remit, changes in italics

Price stability Operational target remains 2% CPI at all times

MPC can allow inflation to deviate from the target temporarily

Communication Governor should send open letter to Treasury when CPI deviates ±1pp from target, to be published alongside the minutes following the CPI release In their communication the MPC should promote: (1) the outlook for inflation and reasons for deviations from the target (2) the policy action the MPC is taking in response (3) the horizon over which the MPC judges it is appropriate to return inflation to the target (4)the trade-off that has been made with regard to inflation and output variability in determining the scale and duration of any expected deviation of inflation from the target (5) how this approach meets the Government’s monetary policy objectives

Unconventional The MPC may judge it necessary to deploy unconventional policy instruments in order to set monetary policy consistent tools with the requirements of the remit If unconventional policy tools have implications for credit risk or credit allocation, the MPC and the Government will work together to determine the appropriate governance arrangements (as was the case the Funding for Lending) The MPC may judge it to be appropriate to deploy explicit forward guidance including intermediate thresholds

Relation to the The MPC should reflect, in its decisions and communication, how it has had regard to the policy actions of the Financial FPC Policy Committee (FPC)

Source: Bank of England, Danske Bank Markets

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1 time 1 4 times 4 times 2 0 times 0 times 0 times 0 times 2 times 0 more QE more 12 times 12 than majoritythan than majoritythan majoritythan AssetPurchases both timesagainstboth voted againstvoted QE more alltimesincrease more alltimesincrease more alltimesincrease more Minority voter Minority cuts hikes hikes 2011 2011 5 times 5 times 0 times 7 times 0 times 6 times 7 0 times 0 times 0 16 times 16 Bank Rate Bank ratecutsoragainst ratecutsoragainst allvotesminority for allvotesminority for ratehikesoragainst supportedrateinhike supportedrateinhike most votesminoritymost for

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(joined BoE (joinedBoE (joined BoE (joinedBoE (joined BoE in (joinedBoE formerDeputy formerChief formerchief formerDirector at former Chief UK formerChief Monetary Policy Committee members Committee Policy Monetary Economist 1989) External, NIESR the External, EconomicAdviser CBI theto DeputyGovernor of Member 1980). in FinancialStability Committee FinancialG20 and Stability Board External, Europeaneconomist at GoldmanSachs ExecutiveDirector Chief and Governor, Governor,Economist, Chief ExecutiveDirector since (BoE 1990) ExecutiveDirector 1990) inMarkets (joinedBoE DeputyGovernor 2000) in Titel External, MorganEconomistat Stanley 2009) May to (October2004 01-Aug-2010 - - 01-Aug-2010 31-Jul-2013 01-Jul-2002 - - 01-Jul-2002 28-Feb-2014 - 01-Jun-2011 31-May-2014 - 01-Jul-2008 31-Jun-2016 01-Mar-2009 - - 01-Mar-2009 31-May-2014 - 01-Oct-2000 30-Jun-2013 - 01-Sep-2012 31-Aug-2015 Term - 01-Jun-2009 31-May-2015 - 01-Jun-1997 30-Jun-2013

Hawk Median Median Hawk Median Median Median? (new) Dove/Hawk Dove Median/ Dove Dr Ben DrBen Broadbent DrMartin Weale PaulTucker Charles Bean Ian McCafferty PaulFisher Name DavidProf. Miles King Mervyn Dove Hawk Median Source: Bank of England, Danske Bank Markets APPENDIX: Danske Bank Market’s assessment of members MPC APPENDIX:Market’s Bank Danske

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