Knife-edge MPC decision to take centre stage

By George Johns (UK Macroeconomist) and Mark Miller (Global Macroeconomist), Corporate Markets

The MPC makes its announcement on whether or not to extend the Bank of England’s Asset Purchase Facility (APF) this Thursday.

Since the quantitative easing programme was implemented in March last year, changes to the size of the APF have only been made in quarterly Inflation Report months when a comprehensive assessment is conducted.

Financial markets therefore see this week’s decision as pivotal. Since the MPC’s November assessment, GDP has been significantly weaker than expected, with 0.1% growth in Q4 four times smaller than the expectation implied by the Inflation Report projection.

The composition of growth was also disappointing, driven predominantly by a boost from government services output and the car scrappage scheme, rather than underlying private sector strength.

The lower starting point for the growth projections in February’s Inflation Report will increase the chances of an undershoot of the 2% inflation target at the two-year horizon, assuming Bank Rate and the APF are unchanged.

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* All charts are sourced to Lloyds TSB Corporate Markets Economic Research, Bloomberg, IMF and Datastream

 


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