'Herd Behavior' Makes BoE Action a Closer Call
After a string of better-than-expected economic data for the U.K. in recent weeks, many are expecting the Bank of England to keep stimulus measures unchanged at its policy meeting this week. But a rate cut from the European Central Bank and a sell-off in commodities has made it much harder to predict what would happen, according to analysts.
"We see slightly greater scope for a policy change this month," Philip Rush, an analyst at Nomura said in a recent research note.
A commodity sell-off in oil and metals, which began last month, means inflation is likely to be tempered in the near term, according to Rush, giving the Bank of England an opportunity to roll out new stimulus measures to boost the moribund economy.
(Read More: Despite Uptick, UK Austerity Isn't Working)
"We expect the decision to be close," Kevin Daly and Sebastian Graves, analysts at Goldman Sachs wrote on Friday.
"In expanding and extending the FLS (Funding for Lending Scheme) , the BoE – together with the U.K. Treasury – has already delivered more credit easing. Our central case is that the MPC (Monetary Policy Committee) will judge this easing to be sufficient for now and leave monetary policy unchanged at its May meeting."
The Bank of England at its last meeting said that it would not add to the 375 billion pounds ($582 billion) of government bonds it purchased from March 2009 to October 2012, and that it would keep interest rates at a record low 0.5 percent.
At each of the last three policy meetings, members have voted 6-3 to keep policy unchanged. But the three dissenting voices, including Mervyn King - the BoE's outgoing governor – have voted to increase quantitative easing by an extra 25 billion pounds.
The lack of action by the Bank of England to expand monetary policy, comes at a time when other central banks aren't sitting back. The European Central Bank and the Reserve Bank of Australia have both cut interest rates by a quarter point in the last week on growth concerns, while the Bank of Japan has pledging to double its government bond holdings in two years.
(Read More: ECB's Liikanen: We're Ready and Able to Act)
"Only a week ago, the near-universal consensus was that the Bank of England would leave policy unchanged," Brian Hilliard, an analyst at Societe Generale said in a research note.
"Two aspects of [the ECB's] move are pertinent to the U.K. monetary policy outlook. First, the reason for the cut was a weakening of euro area growth prospects, which raises some questions for later in the year about the U.K. growth outlook. Second, markets often expect herd behavior from central banks."
(Read More:Europe Growth Data Have Been Way Off Mark )
A little "spice" has been added to this Thursday's decision, according to Hilliard but he base case still remains for the BoE to leave its policy unchanged, at least until new governor Mark Carney is installed this July.
The Bank of England's latest interest rate decision is due Thursday at 12 noon London time.
—By CNBC.com's Matt Clinch; Follow him on Twitter @mattclinch81