With some on the nine-member Monetary Policy Committee toughening their stance about the threat of inflation and King insisting the U.K.’s predicament “still feels like a crisis,” economists predict the panel will back finishing their 325 billion-pound ($516 billion) stimulus today. That sets the stage for a showdown in May, when officials will have new forecasts and data on first-quarter gross domestic product.
Policy makers are trying to nurture a recovery under pressure from Europe’s debt crisis and Chancellor of the Exchequer George Osborne’s fiscal squeeze. While surveys this week indicated the economy is gaining momentum, Adam Posen and David Miles still called for another expansion of stimulus last month at a meeting when the majority of their colleagues favored waiting to gauge risks to inflation.
“The data has been turning and there is some evidence inflation is going to be a bit more sticky,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “The big question is not what they do at this meeting but whether they continue with quantitative easing. The May decision is going to be a big signal to the market.”
All 39 economists in a Bloomberg News survey forecast the MPC will maintain its current 50 billion-pound program of asset purchases, which began in February. The panel will also leave itsbenchmark interest rate at a record-low 0.5 percent, according to a separate survey. It will announce the decisions at noon in London.
Sticky Inflation
U.K. inflation eased to 3.4 percent in February from 3.6 percent in January and the Bank of England forecasts it will slow to the 2 percent target by the end of the year.
While Posen and Miles called last month for an additional 25 billion pounds in stimulus, Martin Weale and Spencer Dale signaled they are concerned inflation may slow less than predicted. Dale, the central bank’s chief economist, said on March 20 that an “obvious worry” is tension in the Middle East that “could put further upward pressure on oil prices.”
Posen has since signaled that his view is shifting, saying last week that he is now closer to the central forecast and he isn’t “as worried about downside risks as I once was.”
The Bank of England’s bond program has helped to boost government bonds. The yield on the10-year gilt was at 2.2 percent yesterday in London. It fell to 1.92 percent on Jan. 18, the lowest since Bloomberg began tracking the data in 1989.
ECB Concerns
Inflation is also proving a concern for euro-area policy makers. The European Central Bank held its benchmark interest rate at 1 percent yesterday and President Mario Draghi said that there are near-term “upside” price risks.
In the U.K., Markit Economics said Britain’s economy may have expanded as much as 0.5 percent in the first quarter after its gauges of manufacturing, services and construction all unexpectedly increased in March. Both the manufacturing and construction surveys showed price pressures rose. A gauge of new jobs gained 9 percent in the first quarter from a year earlier, London-based recruitment company Reed said today.
“By and large the story of the U.K. experiencing moderate growth this year is on track,” said David Tinsley, chief U.K. economist at BNP Paribas SA in London and a former Bank ofEngland official. “The global backdrop for inflationary pressures may be a bit firmer than it was. Going into May, which is key, if this data flow doesn’t get contradicted in a big way then the committee won’t feel moved to do more.”
‘Weak’ Recovery
Osborne said in his annual budget on March 21 that he will press on with his spending cuts to rein in a deficit of more than 8 percent of GDP. He said the economy will grow 0.8 percent this year and 2 percent in 2013.
The British Chambers of Commerce said earlier this week that while the U.K. will probably avoid a recession, the recovery remains “weak.” Unemployment (UKUEILOR) is at a 16-year high and consumers are being squeezed as inflation outpaces wage growth. VocaLink, which processes salaries, said today that annual growth in take-home pay slowed in the first quarter to 1.7 percent from 1.8 percent in the three months through February.
BAE Systems Plc (BA/) employees in Samlesbury, England, where work is done on the Eurofighter Typhoon jet, agreed last month to accept pay cuts to save the jobs of 120 colleagues.
The Bank of England’s economic outlook is being clouded by what King has said will be a “zigzag” pattern of GDP. The economy may shrink in the current quarter due to an additional public holiday for Queen Elizabeth II’s Diamond Jubilee in June before growing again in the third quarter, he said.
“The bank will want to keep its options open,” said Neil Mackinnon, a strategist at VTB Capital in London and a former U.K. Treasury official. “We’ve reached a stage where wait-and- see is back in favor, but I am less worried about inflation than the economy flatlining for the next few months. Things are not in a great state.”
To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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