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BOE: Pill may remain more hawkish than the median MPC member for some time

BOE
Bank of EnglandCentral Bank NewsCEEMEABulletUKGlobalFixed Income BulletsForeign Exchange BulletsRegionMarkets
  • Overall a pretty interesting speech from Pill regarding why he didn't vote for a cut in August. He says he likes to "cross-check" the BOE's main forecasting models with a BVAR model.
  • A BVAR model in general can be described more as being statistically rather than fundamentally driven. The model is then broken down into structural drivers.
  • One of these is that the level of R* is higher in the BVAR model than in the BOE's standard models. Pill notes that this is "consistent with the view that the framework underlying the MPC’s forecasts assumes too low a level for the natural rate of interest or R-star."
  • The BVAR model also estimates that there is less economic slack than the BOE's standard models.
  • These concerns have been enough to stop Pill voting for a cut in August.
  • However, the other underlying message (which isn't explicitly spelt out in the speech) is that if Pill believes R* is higher than the BOE central estimates, then even if he does start to vote for cuts at some point, he may prefer to end the cutting cycle earlier than other members of the MPC. So he may well remain on the more hawkish side of the Committee for some time. That is not much of a surprise, but today's speech seems to be confirmation.
  • Note that the median estimate of the neutral rate in the BOE's MaPS survey (which MPC members often refer to) is 3.50%. Markets currently fully price cuts to 3.75% by the August 2025 meeting.
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  • Overall a pretty interesting speech from Pill regarding why he didn't vote for a cut in August. He says he likes to "cross-check" the BOE's main forecasting models with a BVAR model.
  • A BVAR model in general can be described more as being statistically rather than fundamentally driven. The model is then broken down into structural drivers.
  • One of these is that the level of R* is higher in the BVAR model than in the BOE's standard models. Pill notes that this is "consistent with the view that the framework underlying the MPC’s forecasts assumes too low a level for the natural rate of interest or R-star."
  • The BVAR model also estimates that there is less economic slack than the BOE's standard models.
  • These concerns have been enough to stop Pill voting for a cut in August.
  • However, the other underlying message (which isn't explicitly spelt out in the speech) is that if Pill believes R* is higher than the BOE central estimates, then even if he does start to vote for cuts at some point, he may prefer to end the cutting cycle earlier than other members of the MPC. So he may well remain on the more hawkish side of the Committee for some time. That is not much of a surprise, but today's speech seems to be confirmation.
  • Note that the median estimate of the neutral rate in the BOE's MaPS survey (which MPC members often refer to) is 3.50%. Markets currently fully price cuts to 3.75% by the August 2025 meeting.