The immediate decision: After increasing the asset purchase facility (APF) by GBP 50bn to GBP 325bn at the February meeting and after the Inflation Report released in February, we did not expect any material changes in the monetary policy stance at the March meeting. Similar to the decision in February the committee was not unanimous in its decision to leave the target for the APF unchanged at £325bn in March, with two members (Miles & Posen) voting for an additional expansion of the asset purchase facility to £350bn.
The BOE outlook for inflation and growth: Both the decline in inflation since the previous decision and the picture of a moderate underlying growth were largely in line with the projections in the February Inflation Report. However, once again the medium-term outlook for inflation was related to substantial risks on both sides. The central view remained that inflation would continue to decline during 2012 as the contributions from energy- and import prices faded, while spare capacity would weigh on wages and prices.
Monetary policy and FX implications: In the February Inflation Report the inflation forecast was revised slightly higher compared to the previous forecast, reflecting the effect of further asset purchases and slightly higher energy prices. Hence, current BOE projection indicates inflation will be in line with the target in the medium term, after falling to levels just below the target short term. Any sign that inflation would fall more than forecasted by the BOE would probably indicate that inflation is likely to undershoot the target in the medium term perspective and could still be a trigger for further expansion of the APF, especially with two members already voting for a small expansion. However, in February inflation fell less than widely expected and higher oil prices may further reduce the probability for more bond purchases. Although our base scenario does not include a further expansion of the APF, we remain negative on the outlook for the GBP as domestic demand will stay weak and the British economy still needs to rebalance towards external demand.
SEB Research