The Minutes of January 13th monetary policy meeting signaled that the tightening bias inside the Monetary Policy Committee has increased. Indeed, while the majority of the members voted to maintain unchanged both the bank rates at 0.5% and the asset purchase program at GBP200bn, Martin Weale joined Andrew Sentence in preferring a rate hike by 25bp to face inflationary pressures. Adam Posen confirmed its preference toward a further increase in the asset purchase program by GBP50bn. The minutes indicated that BoE’s concerns on inflationary pressures are increased in the last few weeks, especially as regards its consequences on inflation expectations. The inflation report due for release on mid-February will give more details on monetary policy outlook in the short term with publication of new BoE’s projection on CPI and GDP growth. Latest economic data indicated that U.K. economic outlook in 2011 may be worse than previously expected.
Indeed Q4 data released on Tuesday 25th indicated that UK GDP contracted by 0.5% q/q in Q4 ’10, coming in worse than market expectations for a 0.5% q/q increase. Compared to the same period 1 year ago GDP rose by 1.7% q/q versus market expectations for a 2.6% y/y increase. Output in the production industries increased 0.9% (0.5% q/q in Q3) while in the construction sector and in the service industries decreased 3.3% (following the 3.9% q/q increase in Q3) and 0.5% (+0.5% q/q in Q3) respectively. Business services and finance, construction and distribution, hotels and restaurants were the largest contributors to the negative growth this quarter (-0.2%).
The ONS estimated that bad weather is likely to be the main reason behind the contraction in GDP. Without this negative effect GDP may have remained flat in Q4. In every case the economic growth would have been weaker than expected by the consensus. With austerity measures beginning to have an impact on economic growth in Q1 ’11, the outlook for UK economy is likely to be weaker than previously projected increasing the possibility that the Bank of England will maintain rates unchanged in the foreseeable future despite higher than expected inflationary pressures in the last few months (3.7% y/y in December 2010). However the possibility that the BoE may decide to hike rates as early as in May are clearly increased after the release of January’s MPC’s minutes.