Market Mover - BNP PARIBAS - Investment Services India

outlook for GDP and inflation. So have forecasters
been asleep at the wheel and should we have seen
this revision to the Bank’s forecasts coming? Given
what the MPC said in the January minutes, one can
feel excused for being a little surprised by the extent
of the revisions in the February Inflation Report:
Chart 3: BNP Paribas vs BoE Inflation
Projection (%, y/y)
“A fuller analysis of the Government’s Pre-Budget
Report than had been possible when the Committee
had met in December implied that the published
plans did not contain significant news for the outlook
relative to the assumptions underlying the November
Inflation Report”.
We would say that a near 0.5 percentage point
slashing of the two year ahead inflation projection is
pretty significant news! Reading between the lines,
the Bank got such a kicking at the November Inflation
Report press conference for having such an upbeat
growth projection and taking no account of the
inevitable fiscal tightening that it wanted to avoid a
repeat. We completely agree with the thrust of the
revisions. After all, our own CPI inflation projection is
even lower than the Bank’s during 2011.
Rate hikes are a long way off
The interpretation is crystal-clear. The fact that the
inflation projection based on market rate
expectations is well below target two years ahead
shows the market is well ahead of itself in pricing in
rate hikes. That projection is still below the 2%
inflation target even after three years. Furthermore,
with even more fiscal tightening likely to be
announced in the aftermath of the election, that
projection could be revised down yet further.
The latest Inflation Report supports our long-held
forecast that Bank Rate is likely to remain on hold for
a very long time. We are at the very aggressive end
of the consensus range. While most expect a rate
hike before the end of this year, we expect no rate
Source: Reuters EcoWin Pro
hikes for the whole of 2010, and probably the whole
of next year. The new Inflation Report has reinforced
our conviction. King stated that it is far too soon to
conclude that no further bond buying is needed.
Clearly the door is open to more QE, though the
likely improving data flow will make that a much
harder call.
The next key event on the UK monetary policy
horizon is next week’s MPC minutes. In November,
the inflation projections provoked one member to
dissent in favour of more QE than the GBP 25bn
expansion that was delivered. Since then, the
inflation projection has been shifted lower. Hence if
one member saw the case for more QE back in
November, these projections would clearly support
the case for dissenting now. Hence we expect a split
vote. Clearly the majority on the committee opted for
a pause in QE. King noted that it was not the Bank’s
job to fine-tune by using QE.
Alan Clarke 12 February 2010
Market Mover
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