BOE Stands Pat, as the Economy Moves Forward

The Bank of England kept rates on hold as widely expected.  While there has been much discussion, if not consternation, over the possibility of QEII in the US, many observers have missed the creeping talk, in part encouraged by BOE Governor King, of another round of asset purchases by the BOE.  Similar to the Fed, if it does transpire, most are not expecting it imminently.  Talk in the UK is that a window of opportunity (necessity?) may open Q1next year as fiscal contraction kicks in.   Meanwhile, one of the reasons that the BOE explains some of the inflation pressures that have required it to formally explain itself to the Treasury is sterling’s past decline on a trade-weighted basis.  That decline of sterling, however, has not been sufficient to help the trade account very much, underscoring our sense that officials and investors often exaggerate the role of exchange rates.  The UK’s July trade deficit of GBP8.67 bln was nearly 20% larger than the market expected after a GBP7.5 bln deficit in June.  The deterioration was roughly spilt between EU and non-EU.   Like the US and Canada experienced in June, the UK recorded an import surge in July.   Imports rose a sharp 3% on the month, while exports were off 0.9%.  Some may see the import surge as a sign of a stronger domestic economy.