MNI ANALYSIS: BOE Newcomers Ramsden, Tenreyro Tilt To Tighten

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

tightening policy.

     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

there underneath. 

     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

data.

     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

risky.

     "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: david.robinson@marketnews.com

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