MNI BOE WATCH: Wary BOE Seen Holding Policy, Eyes On Guidance

The Bank of England is set to hold Bank Rate at 5.25% this week, and while analysts are divided over whether it will soften December’s guidance by removing a reference to possible further tightening, the Monetary Policy Committee is likely to take a cautious approach in adjusting its communications as it edges closer to an easing cycle.

At the December meeting the Monetary Policy Committee voted six-three for unchanged policy, with three backing a 25-basis-point hike. Given that the Committee has previously published guidance despite dissent, the reference in the statement to the possibility of "further tightening in monetary policy" could be removed even if one or more members continue to vote for a hike this time round.

A stronger signal on the future policy path would come if the Committee also removed the reference for policy to "likely to need to be restrictive for an extended period of time."

But, with policymakers placing less weight on the central forecasts which will be included in the BOE’s updated quarterly economic projections, the MPC might opt for caution. The BOE’s research has also highlighted the power of modifications to guidance. (See MNI INTERVIEW: Forward Guidance Key Tool However It Is Called)

NEED FOR CAUTION

BOE Deputy Governor Ben Broadbent recently argued that policy changes in an environment of additional uncertainty will probably be delayed and fellow deputy Sarah Breeden, who is championing the use of alternative economic scenarios, has stressed the need for caution in interpreting the output of economic models. Meanwhile, former Fed Chairman Ben Bernanke is undertaking a review of the Bank's use of forecasts and its forecasting procedures.

The BOE’s November forecasts showed inflation reaching the 2.0% target by end-2025, with upside risks putting the mean forecast at 1.9% at the three-year horizon, on the assumption that Bank Rate would stay at around 5.25%, in line with what were then market rate expectations. This month, the near-term inflation forecast looks set to be lowered.

But, while pay settlements are dipping, they were still at 5% in the early data from this January's pay round, about two percentage points higher than would be compatible with the Bank’s 2% inflation target given its assumption of productivity growth of 1%.

November’s Monetary Policy Report attached a much-higher-than-usual probability to inflation coming in significantly above or below target. The MPC also expressed caution over model predictions for a moderation in future pay settlements if inflation eased.

The BOE’s topline projections will be based on a market curve taken from 15 working days ending in the week before the policy announcement, which implied about 125 basis points of cuts by year-end. The curve has since shifted higher, and currently implies only 110 basis points of cuts.

The Bank will also publish its full supply-side stock-take.