Bank of England Sees Low Inflation Through 2010

The Bank of England (BOE) released it's quarterly report on inflation expectations today, which stated that the Bank expects inflation to remain in the 1-2% range over the coming two and a half years. What the headlines about this release didn't reveal is that, according to the inflation probability model provided by the BOE (Chart 5.4), the year 2010 will be characterized entirely be year over year percentage decreases in inflation. In fact, the Bank of England's models are forecasting some probability of the country experiencing negative inflation towards the end of 2010. Obviously, there is a difference between disinflation and outright deflation; however the notoriously flexible central bank models are grazing dangerously close to the deflationary realm.

From a macro standpoint, the report below tells us one very important thing: the Bank of England is expecting the next 18 months to be characterized by very slow, very weak growth. Any other assumption, when factored into an inflation probability model, would exert at least some upward pressure on the price of goods and services across the UK. As I've already pointed out, the BOE is expecting an entirely dis-inflationary 2010. For now, I remain firmly in the camp that perceives deflation to be the far greater threat than inflation.

BOE Q2 Inflation Prospects Sphere: Related Content

Bank of England Reserve Balance Update: July 2009

The Bank of England released it's monthly reserve balance report today, verifying that a literal explosion in the size of reserve balances has occurred. Back in April of 2009, the BOE reported total reserves at 71.3 Billion Pounds; by July that number had mushroomed to 152 Billion Pounds outstanding. Other selected figures of note from the release:

• the 12 month reserve balance growth rate stands at 442.3%
• the reserve balance grew 21.3%, Month to Month
• the BOE seems to have "moderated" it's expansion of reserve balances, leveling off at a smooth ~27 Billion Pounds per month; this creates a deceptive illusion in that the monthly growth rate of reserves has been in decline despite the absolute level of expansion remaining relatively the same.
• What UK recovery?

The situation in the UK is literally spiraling out of control. The American press seems to have taken little notice to this fact, choosing to focus instead on the less-worse job numbers, and lulled to sleep by the outrageous-yet-no-longer-explosive Federal Reserve balance sheet. As for the Bank of England, it appears that the decision has been made to avert deflation at any cost.

Alas however, inflation has historically been far more preferable than deflation - for the ruling class that is. We all know that inflation ravages the savers of the world; a category that does not include the governments of Western industrialized nations.

*InfoNgen facilitated this post's research

Bank of England Reserve Balances as of July2009 Sphere: Related Content

Bank of England Increases Asset Purchase Program by 50B Pounds

The Bank of England (BOE) has just announced this morning that it will increase the size of it's asset purchase program by 50 Billion Pounds, or 40%, to 175 Billion Pounds. For most folks - and especially economists, the BOE's decision came as a surprise. Bloomberg reported that out of 44 economists deemed significant enough to be polled on the matter, nearly half responded that they expected the BOE to halt, or at least not increase the size of the asset purchase program. The Pound immediately withered like a snail doused with salt upon the announcement of the Bank's decision.

The Bank of England is headed down a path that will prove increasingly treacherous for the nation. To speak generally, England's economy embodies most every negative attribute of the American economy, without enjoying any of the positives. It's really very similar to a recent episode of Entourage, in which Ari Fleischer became furious at the stress he had incurred while lying to help cover up a friend's affair. Ari screamed at this friend and said "Damn it, I will not have the stress of an affair without any of the sex!". This is similar to England's relationship with America. They rely heavily on the finance/financial services industry for employment, borrow too much like Americans, and spend too much like Americans. What England doesn't possess is a large industrial base, a reserve currency, or the status as a store of the world's excess savings. Apparently though, the Bank of England would prefer to test the gilt markets, and see just how much the asset purchase program can distort the nation's primary means of funding itself. Good luck boys, and enjoy the stress of the affair. Sphere: Related Content

BOE Reports Weak Mortgage Demand, Foreign Capital Outflows

In it's monthly report chronicling the wounded-calf-like state of the British lending establishment, the Bank of England indicated that flows of net mortgage lending, in May, reached the lowest level ever recorded in the modern era of data collection (that would be 1993 for the BOE). In a positive twist, the BOE did report that major UK lenders have been lowering their credit standards as of recent. In all seriousness though, the UK is basically the US - minus of course the cheap reserve currency. Therefore, it shouldn't come as a surprise that the BOE's report would contain some difficult (if you're British) to swallow data points.

The most dismal section of the report can be found on pg5 of the pdf below, specifically Chart 1.1 "Contributions to growth in lending to UK businesses". This chart contains nothing that could even remotely be spun as "green-shootish", as the flow of capital away from UK businesses appears to be accelerating. The trend is most pronounced as it relates to the direction of flows of foreign capital, a source of funds that is literally fleeing the island. This new trend is of an especially aggravating nature for UK businesses, as Chart 1.1 illustrates the fact that in the final stages of the debt bubble, businesses within the UK relied on foreign-owned Inflows for almost half of all new growth.

In short, if we could create a new word, designed to convey a stronger feeling of bearishness than the word "bearish" itself, we would use that word to describe our short,medium, and long term investment sentiment towards the UK economy.

*no position in the UK.

BOETrends in Lending July09 Sphere: Related Content