Purchasing managers’ indices in the UK were generally better than expected and pointed to growth in January. The chances of an official recession are now lower.
Nevertheless, even if Britain escapes another quarter of contraction, the QE train seems unstoppable.
The numbers
The most important sector is services, which was the last to be released. The PMI for this sector jumped from 54 to 56 points. This means accelerated growth and it looks even better when compared to the early expectations, which stood on a drop from 54 to 53.5 points.
Manufacturing was lagging behind and was in contraction zone, under 50 points. It also surprised. Not only did it climb back above 50, but it did with a leap to 52.1 points, higher than 50.1 that was predicted.
Only the construction sector fell short of expectations, sliding from 53.2 to 51.4 points. This is still above 50 and reflects a smaller sector.
QE Train Out of the Station
Despite all this improvement, the Bank of England will likely embark on another round of Quantitative Easing, or in its own language: expand the Asset Purchase Facility program.
It currently stands on 275 billion pounds, and an additional 75 billion will likely be added in the upcoming meeting.
Why?
- Current expansion expired: The recent expansion of 75 billion, introduced in October, already ran its course and expired at the end of January. This is the perfect timing for expansion.
- Unemployment is still high: this weighs on the economy. With the government busy with austerity, the central bank is urged to “do something”. The same applies for the US.
- Hints: The most dovish member of the Monetary Policy Committee, Adam Posen, certainly supports more expansion. That’s not surprising. What is more convincing, is that Posen hinted that this view is the majority within the MPC.
The next rate decision will take place on February 9th. Another round of QE could certainly cut the recent impressive rally of GBP/USD.
For more on the pound, see the GBP/USD Forecast.
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