BOE MPC: Warns More Tightening Likely Than Market Assumed>

-Votes 6-2 For Unchanged Bank Rate; Saunders, McCafferty For 25bps Hike  

     By David Robinson

     LONDON (MNI) - The Bank of England Monetary Policy Committee voted 

six-to-two to keep Bank Rate unchanged at 0.25% at its August meeting, 

but warned that policy was likely to be tightened by more than the 

market was assuming. 

     Only Michael Saunders and Ian McCafferty voted for a hike, with 

both of these having backed tightening at the previous meeting in June. 

Newcomer Silvana Tenreyro supported unchanged policy, with the 

six-to-two vote matching analysts' median forecast. 

     The BOE conditioned its quarterly Inflation Report forecasts on 

market pricing that there would be one 25 basis point Bank Rate hike in 

Q3 2018 and that Bank Rate would only be at 0.8% by Q3 2020. The MPC 

warned that this assumption of a couple of hikes over three years was 

too low. 

     "If the economy were to follow a path broadly consistent with the 

August (Inflation Report) central projection then monetary policy could 

need to be tightened by a somewhat greater extent over the forecast 

period than the path implied by the yield curve," the MPC minutes said. 

     The Inflation Report central projections for growth and inflation 

were little changed from May with inflation shown holding above the 2% 

inflation target throughout the three year forecast horizon. 

     CPI was projected to peak at 2.75% in Q4 this year before easing to 

2.58% in Q3 2018 and 2.19% in Q3 2019 and 2.22% three years ahead. 

     The long drawn out pass through from higher import price inflation 

was expected to push up near term inflation, and as that effect fades 

strong domestically generated inflation was expected to push up CPI in 

the final stages of the forecast. 

     Softer than expected GDP data led the MPC to nudge down its near 

term growth forecasts but GDP growth was then expected to hold around 

0.4% a quarter through the three year forecast. 

     The forecast for GDP in calendar year 2017 was cut to 1.7% from 

1.9% and to 1.6% from 1.7% for 2018 but left unchanged at 1.8% for 2019. 

     The MPC stuck to its guidance that rate hikes, when they did come, 

were expected to be limited and gradual and that policy would respond to 

changes in the economic outlook. 

     The MPC at its August meeting had a fourth vote, on whether to end 

the Term Funding Scheme's drawboard period as planned on February 28 next 

year. 

     The TFS was set up to help ensure the August Bank Rate cut was 

passed on in full by lenders, by offering them funding at or close to 

Bank Rate. The MPC voted unanimously to end its drawdown period as 

planned. 

     Extending the TFS would have been a way of adding stimulus but the 

MPC is now debating tightening, not easing, policy. 

     The outlook for real earnings remains gloomy, with the MPC cutting 

its average weekly earnings forecast. The four quarter AWE forecast for 

Q4 2018 was lowered to 3% from 3.5% in May and to 3.25% from 3.75% in Q4 

2019. 

     With inflation projected to be at 2.75% in Q4 real earnings growth 

near term looks set to be anaemic at best and weak going forwards. 

     The weaker earnings forecast reflected in part anticipated sluggish 

productivity growth, with Brexit uncertainty expected to weigh on 

investment. 

     Unemployment is expected to hold just below the equilibrium, or 

neutral, rate of 4.5% for much of the forecast horizon, standing at 4.4% 

in the fourth quarter of this year, 4.5% in the fourth quarter of 2019 

and 4.4% in three years' time. 

     London Bureau; e-mail: david.robinson@marketnews.com 

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