MNI INSIGHT: BOE Clarifies Tightening Strategy, Focus On Rates

Bank of England Governor Andrew Bailey has clarified the Monetary Policy Committee's majority view of its new tightening strategy, stressing that interest rates should be the BOE's tightening tool after two members called for quantitative easing to be ended first.

The MPC's September minutes and a speech by Bailey several days later have led market observers to bring forward expectations of a rate hike, with the governor saying that an increase in Bank Rate would, if needed, come before the end of the current asset purchase programme in December.

The clear message that Bank Rate would be hiked first if tightening was needed, should put paid to any idea of an earlier end to quantitative easing, after Deputy Governor Dave Ramsden and independent member Michael Saunders both voted at the September meeting to lower the government bond purchase target from GBP875 billion to GBP840 billion.

Bailey's speech clarified the BOE's new approach to tightening, which was set out in August following a months-long review process. Keen to provide markets with ample warning of its path to reducing stimulus, the BOE says it will begin to reduce its stock of assets via natural run-off, allowing its gilt holdings to mature without replacement, only once Bank Rate rises to 0.5% from its current 0.1%.

Ramsden and Saunders evidently considered that an early reduction in the the target level of purchases, which all on the MPC agree is tightening, would be compatible with that guidance. But, given that the QE programme is set to be completed in December, with only about GBP20.6 billion left to go by the November meeting, it would be a relatively symbolic gesture by the two if they were to vote again to end the scheme.

BANK RATE

Now the question for Ramsden and Saunders will be whether they will switch their support for lowering asset purchases to calling for a hike in Bank Rate. No MPC member voted to hike in September.

While inflation is now expected by Bank economists to rise to over 4% near-term, it seems likely that the MPC will remain divided over when to tighten, particularly given uncertainty over the path of wages and employment. The BOE should have a labour market stock take ready in time for the BOE's November meeting, giving the MPC a better idea of whether wage rises will result in higher inflation sticking around for longer than previously thought likely as the economy emerges from the Covid shock.

The latest data showed over 1 million advertised job vacancies, as well some 1.7 million people on the furlough scheme, which provides state funding to those not working but still attached to an employer.

One thesis, set out by Saunders in the past, is that 'job vacancies' are not the same in the modern, digitalised world as they were in years gone by as the cost of advertising has plunged and employers can place them without any strong commitment to hiring. Employers who were optimistic about the economic outlook following the ending of Covid restrictions could swiftly stop looking to hire if evidence mounts that the recovery has stalled.