MNI: BOE Leaves Policy On Hold; Lowers Inflation Profile>

-BOE MPC Vote 7-2 For Unchanged Policy; McCafferty, Saunders Backed Hike

     By David Robinson                                  

     LONDON (MNI) - The Bank of England Monetary Policy Committee (MPC) 

voted seven-to-two for unchanged policy at its May meeting with two 

external members, Ian McCafferty and Michael Saunders, both backing a 25 

basis point hike. 

     The Bank's May Inflation Report (IR) projections showed headline 

CPI inflation returning to the 2.0% target by the third quarter of 2020 

conditioned on a market path for three 25 basis point rate hikes over 

the next three years. The IR projections pointed to gentle tightening, 

with only one hike this year. The market curve had Bank Rate rising 

to 0.7% from its current 0.5% in the third quarter of this year. 

     All the dissents in recent years in favour of higher Bank Rate have 

come from the external members on the MPC, rather than the senior BOE 

officials on the committee - the insiders. The May meeting extended this 

trend with Governor Mark Carney and his four fellow insiders all 

opposing tightening. 

     In the February Inflation Report the profile showed CPI drifting 

back slowly towards the 2.0% target over the three year horizon, but the 

May one showed it hitting 2.0% in Q3 2020 and staying there, coming in 

at 2.01% in Q4 2020 and at 2.0% in Q1 2021 and Q2 2021. 

     The lower inflation profile was largely due to the Bank, like the 

Office for Budget Responsibility, changing its assumption to now predict 

that the pass through from sterling's post-Brexit vote depreciation will 

be less prolonged than previously thought. 

     The BOE's growth forecast for 2018 was lowered to 1.4% from 1.8% 

because of the unexpectedly weak 0.1% quarter-on-quarter Q1 outturn. 

Quarterly growth rates after Q1 were barely changed from the February 

forecast, implying that the lost output in Q1 has gone forever. 

     "For the majority of members, increase in Bank Rate was not 

required at this meeting. The recent weakness in data for the first 

quarter had been consistent with a temporary soft path, with few 

implications for the current degree of slack or for the outlook for the 

UK economy," the May MPC minutes said. 

     For the majority on the committee "there was value in seeing how 

the data unfolded over the coming months, to discern whether the 

softness in Q1 might persist." 

     There is a perpetual debate among the MPC about the potential costs 

and benefits of moving earlier or later when faced with a lack of 

clarity in the data. 

     For the majority of members "the costs to waiting for additional 

information were likely to be modest, given the need for only limited 

tightening over the forecast period," the minutes said. 

     McCafferty and Saunders put more weight on the more positive trends 

in business surveys and the apparent strength in the labour market. 

     They judged that "a modest tightening of monetary policy at this 

meeting could mitigate the risks of a more sustained period of 

above-target inflation that might ultimately necessitate a more abrupt 

subsequent change in policy." 

     The MPC proffered no direct comment on market rate expectations and 

nor did they say anything explicit about the likely timing of the next 

rate hike. 

     -London newsroom: e-mail: david.robinson@marketnews.com    

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