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By David Robinson
LONDON (MNI) - The two most recent recruits to the Bank of England Monetary
Policy Committee both set out positions this week that were in synch with the
MPC's central projections in the May Inflation Report and both make the case for
Dave Ramsden, who joined the MPC last September as Deputy Governor with
responsibility for financial stability, dissented from the November 25 basis
point hike and the snap judgement from some analysts on Silvana Tenreyro, a July
joiner, was that she was going to be dovish. Neither now looks likely go out on
a limb and oppose further tightening, with their comments increasing the
likelihood that the next hike could come as early as August.
Speaking Monday, Tenreyro argued that the Phillips curve, which assumes a
positive relation between inflation and the output gap, was alive and well.
The MPC assumes that the output gap is minimal, with the May Inflation
Report putting it at just 0.25% of GDP.
"I expect that the tight labour market will continue to feed through into
domestic cost pressures -- I think that fears of a breakdown in the relationship
between slack and inflation are misplaced," Tenreyro said.
In her view, successful monetary policy, aiming for stable inflation with
growth at potential, acts to conceal the Phillips curve -- but that it is still
When Ramsden opposed the November hike, he did so in part because he was
sceptical that historically low unemployment would feed through to higher
earnings, reckoning that there may be more slack than headline measures of
unemployment were suggesting.
--PAY GROWTH PICK-UP
Since then, his concerns have been allayed. In February, the MPC forecasts
took his arguments on board and lowered its estimate of the equilibrium
(non-inflationary) jobless rate to 4.25% from 4.5%. Ramsden said that he was
more comfortable with the balance of risks around the central MPC forecast.
Regular pay growth has accelerated from the 2.1% 3-month year-on-year reading
the committee was looking at in its November meeting to 2.9% in the most recent
Both MPC members reckoned that the very weak growth in Q1, of 0.1% on the
quarter, was very likely a weather related aberration. The MPC in May assumed
that growth in Q2 would not recoup the lost ground with quarterly growth only
rising back up to 0.4%, with some economic activity, particularly in services,
lost to the weather and gone for good.
"We ended up with growth coming back to 0.4% in Q2 rather than going higher
.. if because of the weather you have not been able to enjoy a meal out you
probably don't go and have two in the next week," Ramsden said in his Q and A.
But with the MPC putting the speed limit on UK growth at 1.5% a year even
0.4% quarterly growth could squeeze slack.
--Q2 GDP ESTIMATE
At its meeting ending August 2 the MPC will have data for April and May GDP
growth but not June, allowing for a decent stab at estimating Q2 GDP. Absent
hefty downside shocks, the MPC may be uneasy about further delaying a hike.
Tenreyro published model projections suggesting that the costs of delaying
tightening by a quarter were marginal, but that postponing much longer was
"Waiting a few more quarters increases the likelihood that inflation
overshoots the target," she said.
With two MPC members, externals Ian McCafferty and Michael Saunders,
already voting for a 25 basis point hike at the May meeting an MPC majority for
an August hike looks plausible, with June a stop-gap meeting.
--MNI London Bureau; tel: +44 203-586-2223; email: firstname.lastname@example.org