BOE meeting

The Bank of England (BOE) will meet on Thursday, September 10th. At the August BOE policy meeting the BOE decided to hold interest rates unchanged at a record low 0.5% and announced a surprise expansion of quantitative ease. The BOE increased its quantitative ease program from £125 bln to £175 bln. The MPC minutes for the August meeting indicated that the BOE policy board was split over the decision to expand quantitative ease with three board members including BOE Governor King seeking a larger expansion to £200bln. GBP has underperformed since the BOE decision in August to expand quantitative ease. The British Chamber of Commerce (BCC) calls for the BOE to cut interest rates to zero. The BCC expects UK GDP to contract by 4.3% before recovering in 2010 and sees the economy still at risk of a relapse. BBC Chief Economist Kern says that lower rates would help reduce the cost of borrowing and help struggling firms. According to Kern, there remain blockages to UK lending despite quantitative ease and lending to businesses and consumers is falling. BOE officials are reluctant to cut interest rates to zero because it would hurt profitability of the banks and may do little to encourage more lending. BOE overnight lending rate has been at 0.5% since March. BOE officials prefer to rely on quantitative ease to try to boost credit. The key question, does the BOE see the need for additional quantitative ease as insurance for the UK economy?

Recent UK economic data suggest that the UK recession may be ending with manufacturing and services PMI rising to their best level in 18 months, consumer confidence at its highest level in 15 months, exports up sharply in August, the housing market stabilizing and the labor market showing signs of recovery. According to the Daily Telegraph, the UK recession appears to be over. Improving UK domestic economy should encourage the BOE to make no changes in current monetary policy.

The BOE is expected to keep monetary policy unchanged at 0.5% and continue with the current level of quantitative ease. There is an outside chance that the BOE will elect to expand quantitative ease by an additional £25 bln because of continued uncertainty about the sustainability of the UK recovery and the split among the BOE policy board in August. The main risk to the GBP would be that the BOE surprises again and expands quantitative ease.

BOC meeting

The Bank of Canada (BOC) will meet on Thursday September 10th. At the August BOC policy meeting the BOC elected to hold the overnight rate unchanged at 0.25% and reaffirmed that the overnight rate would remain at this level until Q2 2010. The BOC policy statement said steady rate policy is contingent on inflation remaining in check. The BOC is expected to hold monetary policy steady Thursday and refrain from implementation of non-conventional policy measures.  Recent Canadian economic data suggest the Canadian recession is nearing an end. Canada unexpectedly added 27k new jobs last month, June GDP rose by a modest 0.2%, housing starts surged in August and manufacturing PMI is back above 50 which means manufacturing sector is expanding. Canadian inflation remains subdued. The BOC has no need to adopt non-conventional policy measures or change monetary policy in light of signs of recovery in Canada's economy and low inflation. Canadian think tank C.D. Howe expects the BOC to hold policy steady Thursday and looks for the BOC to begin raising interest rates in September 2010. CAD is trading near the high for the year versus the USD. BOC officials have expressed concern that the continued CAD strength may hurt the Canadian recovery. The BOC may reference CAD strength at Thursday's policy meeting. Another BOC statement about CAD strength will increase the risk of intervention. Threat of BOC intervention is the main risk from Thursday's BOC meeting for the CAD.