Inflation was a bit of a given due to the VAT increase falling out of the index. However, this will not prevent the Governor of the Bank of England having to write once again to the Chancellor explaining why inflation is still off target, albeit this may be one of the last letters for a while. The industrial production and trade figures were also not too much of a surprise given that imports had fallen due to consumers limiting their spending.
The Bank’s monetary policy committee has announced another £50bn of quantitative easing (QE) making total Bank purchases of gilt stock to date £325bn. This represents approximately 27% of all stock issued and on this occasion will be distributed across all maturities.
It is a shame that this QE is not more targeted to the longer dated maturity spectrum where it may have more impact, in particular helping to keep the cost of infrastructure projects down. Despite the positive signs noted above, we suggest that the economy is still weak enough to warrant the need for an additional £50bn of QE in May.
In contrast, the Eurozone crisis gets no better. The Greek parliament has voted to approve the latest austerity measures in exchange for a second bailout of €130bn. This is despite the elections in April after which there may be a move to alter the terms of the bailout agreement. It is debatable if enforced long-term austerity is a better alternative to exiting the euro. But there can be no doubt that if Greece did exit, the country would fall into economic chaos and experience significant social disruption.
On a different note, Moody’s rating agency has recently put the UK on ‘negative’ watch amid fears of contagion from the European debt crisis. This puts the AAA rating in danger of a downgrade in the next 12 to 18 months. This may be considered a wakeup call to ensure that we continue to address our own debt problems. A Moody’s statement suggested that the UK “was at risk of any further deterioration in European economic conditions”, which is of course a genuine and real danger.