GBP

Analysis: BOE MPC Doubts In Face Of Resilient Inflation
BOE MPC Wrestles With Uncertainty Over Spare Capacity Levels
Policy On Hold Facing Downside Growth Risks; Upside Inflation Risks
LONDON (MNI) Faced with persistently stronger-than-expected
inflation, and the risk of eurozone, and sovereign debt, turmoil
contributing to below forecast growth, Bank of England Monetary Policy
Committee members are offering no assurances that policy will be on hold
for a prolonged period.
The outcome of this weeks MPC meeting is a foregone conclusion,
with the committee sure to leave policy on hold ahead of the new
governments first budget on June 22 and with the economic outlook so
uncertain. Recent comments by MPC members, however, have highlighted
both their uncertainty over the causes of the currently elevated
level of inflation and fears that events could spin out of control.
The MPCs central view is that substantial spare capacity in the UK
economy will drive headline inflation back below the 2.0% target level
while the economy rallies. The BOE, however, is struggling to
get a clear take on how much spare capacity there really is following
the recession, and MPC members worry about second-round inflation
effects and downside growth risks.
Monetary policy makers around the world were widely criticized for
over confidence prior to the credit crunch but recent comments from the
latest batch of MPC members show humility.
Are we confident that we can go on, we can keep the economy
on track and hit the inflation target ? Given the scale of the
shocks and challenges we face I would be far from confident that it
will be easy to come across the right mix of policy to do that, Kate
Barker said in her farewell interview in the Financial Times.
Barker, who left the MPC in May, and who has not been replaced for
the June meeting, offered no false assurance the committee would be able
to offset the impact of a widespread sovereign debt crisis.
There are things where its very difficult for monetary policy to
mop up after. Both a debt crisis either that comes out of the banks or a
debt crisis thats more based in sovereign debt would pose tremendous
difficulties for monetary policy to mop up after, she said.
When headline CPI rose to 3.7% in April, 1.7 percentage points
above the BOEs target, Governor Mervyn Kings attributed the rise in
his open letter to Chancellor of the Exchequer George Osborne to three
factors: higher oil prices, the rise in value added tax and sterling
depreciation.
His colleagues on the MPC, however, have said while these factors
go a long way to explaining high inflation levels, additional factors
appear to be at play.
The BOE staff are battling to assess how much spare capacity the UK
has left following the credit crunch and whether price competition has
diminished. There is a concern that with some companies pulling out of
markets, and the survivors looking to restore profit margins, price
competition has become less intense than it was in the pre-crunch years.
In an op-ed piece in the Daily Telegraph BOE Deputy Governor
Charles Bean explored the reasons why inflation has come in far above
the BOEs forecasts, noting that just a year ago the central bank put
the odds on inflation exceeding 3% at only one in 15.
In his piece, Bean raised both the reduced capacity and price
competition fears.
Part of the explanation could be that the credit crunch has
resulted in more loss of supply capacity than anticipated. Also,
businesses seem to have opted to maintain profit margins and cash flow
against a background of reduced credit availability, rather than cut
prices to boost sales, Bean said.
Even if oil prices continue to ease back and sterling rallies,
the concern is that inflation will not fall back as far as expected.
The upcoming June 22 budget adds another layer of uncertainty to
the inflation outlook. Many analysts have been anticipating a rise in
value added tax, which would feed through directly into headline
inflation.
What is far less clear, and what has been widely debated in tax
policy making circles, is when a VAT should kick-in, and whether it
should be staged. Everything from a gentle 1 percentage point hike in
2011 to an aggressive 2.5 percentage point hike this autumn have been
rumoured. The latter would add somewhere between 0.6 and a full
percentage point to CPI, depending on the willingness of retailers to
pass it on.
The BOE has its hands tied in forecasting the impact of tax
changes on inflation: like other central banks it only plugs in
publicly announced policy changes into its projections.
While these upside inflation risks persist, the MPC is also
painfully aware growth could turn out to be a lot weaker than its latest
central projection in the May Inflation Report.
There remain considerable downside risks to the

DJ UK 1-Year CPI Expectations Rise To 3.4% In 2Q Vs 2.8% In 1Q

LONDON (Dow Jones)--U.K. inflation expectations sharply rose in the second quarter, a Barclays PLC survey showed Wednesday.
Barclays said its second-quarter BASIX inflation expectations survey showed the public's median forecast was for prices to rise 3.4% over the next year.
That is the highest expected inflation rate since the third quarter of 2008 and represents a rise from the 2.8% rate expected in the first quarter.
On a two-year horizon, median inflation expectations were at 3.8%, up from 3.2% in the first quarter.
"The sharp increase in expectations in [the second quarter] is quite striking. In fact, the last time that one-year expectations rose by such a magnitude was a 0.7 percentage point increase in [the second quarter of] 2008 at the height of the commodity price bubble," Barclays said.
Consumer prices have pushed higher in recent months, with the annual inflation rate rising to 3.7% in April.

-By Laurence Norman, Dow Jones Newswires; 44-207-842-9270; laurence.norman@dowjones.com

EURUSD BEARISH Has cleared the psychological 1.2000 level with the focus now on the 1.1827 support. Key resistance for now comes in at 1.2112. Sell rallies.

USDJPY NEUTRAL Key support lies at 91.00 and then 90.56, break of 92.07 is required to reinstate bullish outlook.

GBPUSD BEARISH Finds support at 1.4376, a break would open 1.4332 and 1.4260. Resistance comes in at 1.4554.

USDCHF BULLISH Focus is on 1.1731, the recently defined trend high. Move through this level would open 1.1967. Support lies at 1.1421.

AUDUSD BEARISH Sharp sell-off on Friday refocuses attention on 0.8068 where a break would open 0.80. Resistance comes in at 0.8276.

USDCAD BULLISH Likely to remain volatile with the next resistance at 1.0719 and the key resistance at 1.0854. Initial support comes in at 1.0480.

EURCHF BEARISH Sharp sell-off through 1.4003 trend low exposes 1.3748. Near term resistance lies at 1.4002.

EURGBP BEARISH Bearish pressure dominates with the focus on 0.8193. Near term resistance lies at 0.8381.

EURJPY BEARISH Bearish trend remains clearly intact and the focus is now on 108.08 which is the 76.4% retracement of the 88.97 to 169.96 rally. 111.80 marks initial resistance.

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Merkel And Sarkozy: Joint Letter To EUs Barroso
EU Commission must accelerate efforts to introduce stronger controls for cds of sovereign bonds and short selling
Should look at possibility of EU-wide ban on naked short selling of all or certain shares and sovereign bonds and dcs of sovereign bonds
Should explore EU-harmonisation of permissible deadlines for clearing and delivery of securities



David Cameron invites a 'double-dip recession' if he insists on Greek medicine for Britain's deficit

Prime minister David Cameron warned on Monday that "Greece stands as a warning of what happens to countries that lose their credibility, or whose governments pretend that difficult decisions can somehow be avoided". We beg to differ. http://www.telegraph.co.uk/finance/economics/7811591/David-Cameron-invites-a-double-dip-recession-if-he-insists-on-Greek-medicine-for-Britains-deficit.html