Watch May for Bank of England Moves: Economists

Anyone expecting the Bank of England to make a move on interest rate or monetary easing policy this month is guaranteed to be disappointed, economists have told

Sharon Lorimer

The Bank, which concludes the monthly two-day meeting of its Monetary Policy Committee (MPC) on Thursday, is expected to make no change to interest rates or make a move in any direction in terms of quantitative easing.

The lack of action comes despite much better than expected Purchasing Managers Index (PMI) data in both the manufacturing and construction sectors earlier this week and better than expected UK service sector figures published on Wednesday.

UK manufacturing PMI rose unexpectedly to a 10-month high of 52.1 last month from 51.5 in February. Analysts had expected a fall in the index in line with earlier expectations that the UK was likely to have experienced a weak first quarter, particularly given the downward revision to fourth quarter gross domestic product.

The story was the same for construction PMIwhich rose to a 21-month high of 56.7, up from 54.3 in February and significantly higher than the 53.5 forecast by economists in a Reuters poll.

Add the services sector data, which read 55.3 for March compared to 53.8 in February - again higher than economists' forecasts of 53.4 - and the overall outlook for the UK economy could be described as improving.

Some analysts said that the better data this week flies in the face of a recent forecast by the Organization for Economic Cooperation and Development (OECD), which last month saw UK GDP as contracting by 0.4 percent in the first quarter of the year, a figure most UK economists now dispute.

David Tinsley, UK economist at BNP Paribas, told that on top of the PMI data released this week, data from the British Chambers of Commerce and the Confederation of British Industry also pointed to a much more positive quarter than the OECD forecast.

“There had been a bit of a wobble before this week in terms of a lot of the economic data coming out, fourth quarter GDP was revised down, mortgage lending looked softer, that sort of thing,” Tinsley said. “But I would be a little bit surprised if that did not show something in the region of 0.3 or 0.4 percent growth.”

Economy Bounce-Back

Peter Dixon, economist at Commerzbank also suggested the economy would bounce back from the previous quarter into positive territory: “My reading of the PMI data is that they are pointing to a reasonably positive number in terms of the first quarter GDP data. But a lot will depend on how the Office for National Statistics (ONS) reads the data so it could still be negative."

"If we were going to make an estimate on the PMI data alone then we would look for something like 0.3 percent rise in GDP in the first quarter which is significantly at odds with the latest OECD estimate,” Dixon told

And in a research note James Knightley, senior economist at ING Financial Markets said that if the PMI data were weighted by their contribution to GDP then the aggregated quarterly average for the PMI is the highest since the first quarter of last year and is at levels historically consistent with GDP growth of around 0.5 percent quarter on quarter.

“This is significantly better than the market was expecting just a few weeks ago and is in complete contrast to the OECD’s recent headline grabbing forecast of a return to technical recession,” he added.

But despite the better than expected figures the Bank of England is not seen as making any policy changes until May when its next inflation report is due to be published.

“I wouldn’t expect much out of this meeting of the MPC. The decision has probably already been made. They will want to get off for their Easter holiday I imagine. Nothing is going to happen,” Dixon said.

Moreover, said Dixon, the case for more quantitative easing was weakening.

Monetary Easing

Monetary easing now accounts for almost 25 percent of annual UK GDP at £325 billion ($513.5 billion), with little or no real impact being seen in terms of increased bank lending to businesses of any size.

“If anything lending to corporates is heading backwards,” Dixon said. “Now that might be a lack of money but it might also be more a question of how do we get the banks lending again. And that’s to large corporates so the banks certainly won’t be lending to small businesses.

“Much will depend on the first quarter numbers, they will be crucial to the decision the MPC makes in May and I would suggest that decision is that one to watch out for. That’s also when the current round of quantitative easing runs out, so if we get a negative number the case for more quantitative easing will be stronger than if we get a positive number. So the first quarter figures should give us a pretty good answer,” he added.

Meanwhile, Tinsley saw the likelihood of the Bank printing more money as being fairly remote even if the first quarter GDP data were worse than was now expected.

“I don’t think that on its own it would be enough to push the Bank into more quantitative easing because no one would trust it given of the other data out there," he said.

“UK GDP is going to look pretty choppy over the course of the year. It’s hard to see how the MPC would be able to get a steer on the direction of the economy before the second half of the year given that we have the extra bank holiday in May, the timing of Easter this year and then on the other side the Olympics," added Tinsley.

"But that’s no different to what it has said itself. If energy prices were to shoot up that might have some impact but it’s the only real threat I can see at the moment,” he said.