Remember the whole UK stagflation scare, where the misery index recently hit a 20 year high, as both inflation and unemployment surged to two decade highs, keeping the GBP strong on expectations of rate hikes by the BOE? Well, the stagflation is still there, but according to just released BOE minutes, there has been a sudden 180 within the Monetary Policy Committee, which has now flipflopped, and just as we predicted, has fallen back to the traditional central bank fall back plan, namely "buy more bonds" as despite surging inflation, the country's central planners once again view deflation as a greater threat. As Bloomberg reports: "Bank of England minutes showed some policy makers see a potential need for further bond purchases as the economic recovery struggles and “downside” risks to growth and inflation mount. For the majority of the nine-member Monetary Policy Committee, “the fiscal challenges in the euro-area periphery highlighted the potential for further adverse shocks to demand,” according to minutes of the June 8-9 meeting published today in London. “For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialized." So the spin now is not to worry about that surging inflation: it's "transitory"... just as the imminent UK QE2 will be: "While U.K. inflation was 4.5 percent in May, more than twice the central bank’s target, Governor Mervyn King said last week that the current price surge is temporary as he defended keeping the key rate on hold to aid the economic recovery during the government’s budget cuts. Paul Fisher said yesterday that adding to the bank’s bond program remains “very much on the table” as a policy tool." Next up: a major quantitative easing episode out of Japan as the two "peripheral" developed economies attempt to fill the void left by the Fed and fail miserably, at which point Bernanke will have no choice but to get involved as well.
Below is Goldman's take on upcoming QE2 out of England:
BOTTOM LINE: Very dovish. No MPC members changed their vote: Dale and Weale voted for +25bps, Posen for additional QE, while Broadbent voted for unchanged rates in his first meeting. But, in the key line of the minutes, "some" of the six swing voters at the centre of the committee now believe that "that further asset purchases might become warranted if the downside risks [from weak growth] to medium-term inflation materialised."
1. The committee as a whole "judged that the downside risks to the prospects for medium-term inflation had increased over the month". The shift in the evaluation of risks appears to have been driven more by concerns over external rather than UK-specific developments. In particular, the weakening in global growth indicators and the possibility that Euro-zone "sovereign debt and banking problems could intensify, perhaps significantly, to the detriment of economic activity and the financial system."
2. There is no presumption that the downside risks will materialise. The MPC raises the possibility that the recent softening in global growth indicators has "primarily been caused by the supply-chain disruption resulting from the Japanese earthquake and tsunami, and the elevated level of oil prices" and will prove temporary.
3. While there is no presumption of QE2, it is clear that the views of majority have hardened against the possibility of hiking in the short-term for "nasty" reasons. Inflation is still expected to rise above 5% in the short term but the committee emphasises that its focus is to "set monetary policy so as to balance the risks of inflation being either above or below the 2% target in the medium term". In this respect, the committee notes that "the latest wage and settlement data had remained subdued".
4. Looking forward, our own view is that the slowdown in global growth indicators will prove temporary and that QE2 will not be forthcoming. But today's minutes clearly represent an important dovish shift.
5. Also released this morning, the Bank's Agents' summary of business conditions indicated that investment, exports and manufacturing output were robust, but consumer spending and construction output were likely to remain weak.
6. Investment plans were strongest among exporters, and these firms also reported an intention to expand capacity. By contrast, investment plans among domestically-facing forms were softer, and directed towards repair and maintenance rather than productive expansion. Manufacturing exports were boosted by increasing world demand and the past depreciation of sterling, and Bank contacts reported a shift in focus towards fulfilling overseas - rather than domestic - demand.
7. On consumption, the Bank cited evidence of falling sales in big ticket items as an indicator that weak growth in household disposable income would continue to constrain consumer expenditure. On construction, the Agents' score implied that output had grown slightly compared to last year, but a fall in public-sector orders was expected to weigh on near-term growth.
8. Capacity utilisation in manufacturing was reported as "on balance, around normal" though constraints on production were greatest among exporters. In the service sector, capacity was tightening slightly in some sectors, but remained abundant in others. There remained significant spare capacity among consumer-facing businesses, and uncertainty surrounding the future outlook for demand left many firms reluctant to boost productive potential. Over the past year, reported spare capacity within firms (both on the Bank's Agents' and BCC surveys) has narrowed considerably. As today's MPC minutes underlined, contemporaneous indicators of output growth in the UK have eased recently. One such measure - the Composite PMI - tends to lead the Bank's Agents' scores, and suggests that reported growth in total activity may decline in the coming months (Chart 1).