MacroScope

Time already to switch off the sterling printing presses?

October 25, 2012

A clutch of top UK economic forecasters on Thursday swept under the rug predictions for another 50 billion pounds of gilt purchases they thought would take place starting just in a few weeks.

News that the UK economy bolted ahead at a 1.0 percent quarterly pace in the three months to September – nearly double the consensus prediction in the Reuters Poll and easily more than twice the last measured growth rate in the United States – was probably a good enough reason on the surface.

But most agree the main reason was an extra work day compared with the prior quarter – when the Queen’s Jubilee celebrations left vast swathes of the country idle – along with a spending boost from accounting for tickets for the Olympic and Paralympic Games.

No forecaster is expecting that momentum to carry through to the end of the year. Even the most optimistic of the bunch are expecting very modest growth, even if there have been clear signs the UK labour market is doing better.

Barclays, which just last week quietly dropped its prediction that the Bank of England would cut Bank Rate further from a record low of 0.50 percent – despite having left it there for several years and making pretty clear it would be more of a hassle to cut it than to leave it alone – said on Thursday that more government bond purchases would no longer take place either.

Our change of view has been prompted by stronger-than-expected Q3 GDP data as well as relatively upbeat comments on underlying economic growth from two pivotal members of the MPC. In light of these developments, as well as recent signs of additional inflation stickiness, we now think it is unlikely that a majority of the MPC will support additional QE in November.

That’s a pretty aggressive change of view. But the spike in sterling showed they weren’t the only ones.

Even Citi’s Michael Saunders, who has had the most consistently aggressive QE forecast from very early on, and who is looking for an additional 125 billion pounds of printed money on top of the 375 billion the BoE has already created, said it wouldn’t happen next month.

Even though the gain in GDP in part probably is temporary, we no longer expect the MPC will expand QE further at the upcoming November meeting (previously we forecast a £50bn increase). We do expect the MPC will expand QE markedly further over time, but the next move probably will be delayed beyond November – perhaps similar to the two-month pause between May and July this year.

Investec’s Philip Shaw also took QE off the forecast, but for a more plausible reason. The Bank of England Governor set out pretty clearly his thoughts on the limitations of monetary policy in a speech that left many thinking that in his mind at least, 375 billion is enough.

This switch is only marginally to do with today’s numbers and more tied to the fact that inflation looks set to rise next month and that Sir Mervyn King appeared to be a touch reticent over sanctioning more QE at his speech in Cardiff on Tuesday evening.

Shaw is not the only one thinking that way.

HSBC has had a forecast for no additional QE for quite some time.

But the oddest view goes to JP Morgan, which opted to cut the QE forecast down to 25 billion extra and not 50 billion rather than to take it off the table. How slowing the pace of stimulus this late in a programme with diminishing returns would do any bit of good remains a bit of a mystery.

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