UK QE To Resume In October

Our thesis that global coordinated monetary stimulus is returning is playing out, first slowly, then very rapidly, with the Fed expected to announce at least Op Twist and an IOER cut at 2:15pm today, following a currency peg by the SNB, more printing promises by the BOJ, and the ECB now assumed to return to cutting rates shortly even as it purchases sovereign bonds in the open market. Sure enough, the latest entrant in the global resumption of printing is the BOE, which in minutes presented earlier, makes it clear it won't lag behind the Fed. From Goldman: "BOTTOM LINE: (i) The September MPC minutes revealed an unchanged vote (8-1 on asset purchases; 9-0 on rates). More significantly, however, for "most members" the decision was "finely balanced" and the committee was unusually forthright in signalling the likelihood of QE2. October now looks like the most likely date for a commencement of QE2. (ii) In other important news today, the ONS announced that public borrowing has been revised down by £6bn (0.4% of GDP) in 2010/11 and by £5bn (0.3% of GDP) so far in 2011/12. This potentially opens the door to a more gradual pace of fiscal tightening, with increased capital expenditure (the so-called "Plan A+")." And with that global relative FX devaluation continues, very much as expected, as does absolute devaluation of all currencies against gold, also very much as expected.

Full Goldman Note:

1.    The MPC generally dislikes providing explicit guidance on future policy decisions on the basis that, if it's clear what they should do in the future, why not do it now? In this context, therefore, the guidance provided by the September minutes is unusually clear. It is worth quoting in full: "For most members, the decision of whether to embark on further monetary easing at this meeting was finely balanced since the weakness and stresses of the past month had significantly strengthened the case for an immediate resumption of asset purchases. For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase programme at a subsequent meeting."

2.    One shouldn't overstate the strength of this signal: while "most" thought the decision was finely balanced, only "some" presumed an extension of QE would be justified at "a subsequent meeting". Nevertheless, given the speed of the ongoing deterioration in global growth prospects and in banks' funding conditions (Chart 1), we now think it likely that the MPC will commence QE2 at the October meeting, rather than waiting until the November Inflation Report forecasting round.

3.    The MPC also discussed other easing options, including "changing the maturity of the portfolio of assets held in the Asset Purchase Facility; revisiting the earlier decision not to lower Bank Rate below 0.5%; and providing explicit guidance about the likely future path of Bank Rate". However, the committee decided that none of these options would be preferable to increased asset purchases "at the current juncture". For a discussion of the Bank's easing options and our views on QE2, see this piece.

4.    Also released this morning, the public-sector net borrowing requirement excluding financial interventions (PSNB-ex) came in at £15.9bn in August: £2.9bn higher than Bloomberg consensus expectations and £1.9bn higher than the PSNB-ex over the same period of last year. This £15.9bn figure was a record for August. Including financial interventions, the PSNB was £13.2bn - also worse than expected.

5.    However, though the August data were worse than expected, this news was outweighed by the significant favourable revisions to past data. The ONS revised down its estimate of the PSNB-ex for the 2010/11 financial year by £5.9bn to £136.7bn. This is equivalent to 9.3% of GDP, and compares with the OBR's estimate of 9.9% of GDP (Chart 2). Around £4 billion of that 2010/11 revision is a result of revisions to local government data, following the replacement of budget forecast data with initial outturn figures for current and capital expenditure. In the current 2011/12 financial year, the PNSB-ex over the period April-July 2011 was revised down by £4.6bn. The July revisions are mainly due to revisions to central government revenue and expenditure (an upgrade of income tax receipts and a downgrade of departmental spending). The revisions between April and June are mainly due to revisions to local government data, again resulting from the replacement of provisional forecast data with reported budget forecasts. On a cumulative basis then, between April 2010 and July 2011, this morning's revisions put the PSNB-ex around £10.5bn lower than the ONS's July data implied (Chart 3). There were also upward revisions to the PSNB-ex in 07/08 and 08/09, and downward revisions in 09/10, but these were all minor in comparison to the revisions to more recent public borrowing data.

6.    Overnight, there were indications in the press that cabinet ministers had begun discussions relating to a potential £5bn increase in the government's planned capital expenditure (the so- called "Plan A+"). While these press reports were immediately denied by the Treasury, it is worth noting that - in the context of the £10.5bn cumulative improvement in the PSNB-ex over the past 16 months on this morning's revised data - a capital spending initiative of this magnitude could feasibly be financed by such 'savings' in the public sector's net borrowing requirement.


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