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Danske Research, a Division of Danske Bank A/S ( Investment Research — General Market Conditions 3 April 2013 Bank of England 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 Mark Carney. 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 Bank of England preview preview England of Bank 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 2 | 3 April 2013 www.danskeresearch.com 3 preview of England Bank | | 3 April 2013 3 April APPENDIX: Danske Bank Market’s assessment of MPC members including voting history Monetary Policy Committee members Minority voter Name Dove/Hawk Term Titel Notes Bank Rate Asset Purchases Dove External, former Chief UK 12 times Prof. David 01-Jun-2009 - Frequent minority voter for increasing APF target. Viewed as Dove Economist at Morgan Stanley 0 times all times increase more Miles 31-May-2015 most dovish MPC member (October 2004 to May 2009) than majority Governor, former Deputy 16 times In minority Feb-13 on increasing APF target (with Miles and 4 times Median / 01-Jun-1997 - Governor, Chief Economist, most votes minority for Mervyn King Fischer). Has previous said that generalised monetary stimulus all times increase more Dove 30-Jun-2013 Executive Director (BoE since rate cuts or against was not a panacea because it ran into diminishing returns than majority 1990) hikes In minority for first time Feb-13 on increasing APF target (with 2 times 01-Mar-2009 - Executive Director for Paul Fisher Median Miles and King). 0 times all times increase more 31-May-2014 Markets (joined BoE in 1990) In Feb-13 speech he proposed more gradual QE (open-ended) than majority 5 times Charles 01-Oct-2000 - Deputy Governor (joined BoE Typically viewed as a key centrist whose vote should be likely to all votes minority for Median 0 times Bean 30-Jun-2013 in 2000) side with the majority rate cuts or against hikes New member, in only public speech so far he expressed Ian Median? 01-Sep-2012 - External, former Chief Median scepticism about the ability of QE to boost demand in the current 0 times 0 times McCafferty (new) 31-Aug-2015 Economic Adviser to the CBI economic environment Deputy Governor (joined BoE Comments from Treasury Committee hearing 26-Feb-13 indicate 7 times in 1980). Member of 01-Jul-2002 - he think patience is important as previous QE still have effect. all votes minority for Paul Tucker Median Financial Stability Committee 0 times 28-Feb-2014 Strongly involved in FLS, thinks need to be adjusted to ease rate hikes or against and G20 Financial Stability conditions for SME cuts Board Did not support additional 50bn QE in Jul-12. Has voiced www External, former chief Dr Ben 01-Jun-2011 - concerns about the effectiveness of further QE, but went into Nov- 1 time Median European economist at 0 times Broadbent 31-May-2014 12 meeting more likely to vote for more QE (did not due to APF voted against more QE .danskeresearch Goldman Sachs coupon transfers and Oct inflation outturn) He is one of three members who voted for an increase in Bank Executive Director and Chief 6 times 2 times Spencer 01-Jul-2008 - Rate H1 2011 Hawk Economist (joined BoE in supported rate hike in both times against Dale 31-Jun-2016 Has voted against APF increase several times - did not support 1989) 2011 more QE additional 50bn QE in Jul-12 .com He is one of three members who voted for an increase in rates 7 times Dr Martin 01-Aug-2010 - External, former Director at Hawk H1 2011. In Nov-12 said he 'was also more concerned about supported rate hike in 0 times Weale 31-Jul-2013 the NIESR inflation than the median position on the committee' 2011 Hawk Source: Bank of England, Danske Bank Markets Bank of England preview p England of Bank Disclosure review This research report has been prepared by Danske Research, a division of Danske Bank A/S ("Danske Bank"). The author of the research report is Anders Vestergård Fischer, Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business.
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