First, let’s begin with a review of what happened last month. In their last meeting, members of the Bank of England‘s MPC chose to hold off on raising rates despite the “good” GDP figures seen in the final quarter of 2009 and the early parts of this year.
While less dovish, Governor Mervyn King emphasized that inflation was being stubborn and that there really was no guarantee that the growth experienced was sustainable.
For the announcement tomorrow, it is widely expected that the BOE will sit on its hands again and NOT raise rates. This means that traders will be turning their attention to other things…
By other things, I mean the accompanying statement… By accompanying statement, I mean discussions whether the BOE will go for another round of quantitative easing.
Let’s take a look at what recent data has to say…
If you’ve been paying attention to the markets and not getting a tan under the summer sun, you’d know that recent data has indicated that the UK economy has been doing relatively “okay”.
While the latest manufacturing and service PMI data failed to hit consensus, they both stayed above the 50.0 mark, which means that both industries are still expanding. Furthermore, last quarter’s GDP reading was revised up to show growth of 1.2%, while the latest retail sales report came out much better than expected.
So is it really time to consider another round of quantitative easing?
Haven’t they had enough? As my momma always said, too much of anything is not good for you! It might just be more prudent to take a wait-and-see approach, to see whether this could be the start of the UK economy’s bullish run.
Looking at the big picture, it seems like force-feeding money into banks doesn’t look good for the economy, especially since the country plans to go on an austerity diet.
Remember that the coalition government promised to make budget cuts amounting to 30 billion GBP per year in order to reel in its deficit to 2.1% of its GDP by 2015.
Another dose of stimulus will only mean more expenses for the UK, and that will only make its debt targets harder to reach. How’s it gonna get some investor lovin’ then?
We also have to take note of the fact that the UK isn’t on Mars or any other planet besides Earth. The UK can look to its trading partners who have been doing relatively well for a little boost to British exports.
Take Germany for example. Just last week we saw that its services PMI rose to 57.2 in August from 56.5 in July.
Although the actual figure fell short of the 58.5 consensus, the increase translated to the fastest rate of expansion posted by the country’s services sector in three years!
So what’s the shizamanizzle of all this? For the GBPUSD bulls, the uncertainty of whether or not we’ll see Quantitative Easing: Round 2 UK Edition may mean that they may not be able to rally at full speed on the charts.
From the looks of it, it seems like the chaps in the MPC hood will have to put on their thinking caps in order to figure this out!
In this old man’s humble opinion, I do not think that the MPC will consider more quantitative easing for some time. After all, they just voted to end the program last month – why the sudden change of heart? As I said, I think it’s still way too early to tell if more stimulus is the way to go for the UK.