MNI: BOE Preview: TSC To Quiz New MPC Members On QE Unwind

--Carney, Ramsden, Tenreyro To Speak About BOE Policy Ahead of Nov IR

By Kieran Williams

     LONDON (MNI) - The Treasury Select Committee will convene Tuesday to

discuss the appointments of David Ramsden as Deputy Governor for Markets and

Banking at the Bank of England and Silvana Tenreyro as an external Monetary

Policy Committee member. The TSC will also quiz Governor Mark Carney on the

'work of the Governor'.

     As a confirmation hearing, this will be the first chance for the TSC to

grill the new MPC members. Ramsden, who fills Charlotte Hogg's position at the

Bank after her tenure at the Bank was cut short after a TSC appointment hearing

unearthed an undisclosed conflict of interest. Ramsden comes from the Treasury,

where he served as head economic adviser. His new role will cover the

implementation of monetary policy as well as the Bank's balance sheet.

     He will be quizzed on his views regarding current monetary policy, and

whether he supports the most recent MPC guidance that a hike will likely be

appropriate in "the coming months."

     Ramsden will face some difficult questions about the Bank's balance sheet

and QE after one of the TSC members confirmed to MNI that they were planning to

ask about the QE unwind process. 

     The Bank says it will not begin to reduce the balance sheet until interest

rates stand at "around 2%" as set out in the November 2015 Inflation Report and

subsequently affirmed by Hogg to the TSC. 

Current OIS pricing project that rates will only hit 1.25% over a 5 year horizon

compared to around 2.25% priced in November 2015. 

     The Asset Purchase Facility, the BOE's QE vehicle, was a subject covered at

Hogg's appointment hearing. Hogg adduced the market's Fed "Taper Tantrum of

2013" to illustrate "how sensitive financial markets can be in response to

central bank communications" on QE unwind.

     Hogg did acknowledge to the TSC in February 2017 that "the current market

curve suggests market participants don't expect such a level (2%) to be reached

for some years to come."

     Some analysts expect the MPC to lower the threshold at which the Bank will

begin QE unwind.

     In a research note Nomura say they expect the MPC to begin reducing the

balance sheet with Bank Rate at 1.5% and predict this level will be hit at the

end of 2019.

     The macro environment has changed significantly since the November 2015

announcement. The lack of another market tantrum after the FOMC announced its

plans to reduce the balance sheet could support a change in stance from the MPC.

     The Treasury has already acknowledged that it will face losses on the APF

holdings, which it underwrites. Given the expectations of erosion in so called

'Brexit buffers' due to downgrades in OBR productivity estimates it may be

preferable to the government to limit these losses and reduce the APF earlier.

     Ramsden has strong links to the Treasury, and was bid a fond farewell by

the Chancellor on news of his appointment to the BOE. And, as QE unwind comes to

the fore, those strong links could raise questions of impartiality at the BOE.

     Silvana Tenreyro, a professor at the London School of Economics, has filled

the MPC gap left by the departure of Kristin Forbes in June. Tenreyro has an

established central banking pedigree having worked as an economist for the

Boston Federal Reserve Bank, as part of a Bank of France Committee and as an MPC

member for the Central Bank of Mauritius.

     At their September meeting the Bank voted 7-2 to keep rates on hold at

0.25%, and 9-0 to keep the stock of QE unchanged, the additional dissenting vote

in June came from Tenreyro's predecessor. 

     Tenreyro also holds a management role at the Centre for Macroeconomics

(CFM) and in a 2016 publication she said "a wider set of policy tools would give

mature and credible central banks like the BOE more flexibility to respond to

changing economic conditions."

     The minutes of the September meeting revealed a hawkish shift for the MPC,

despite the vote staying at 7-2. "The swing towards a hawkish rhetoric was

expected, the minutes came in much more assertive than in the past and set the

path for a rate hike in the 'coming months'," wrote Barclay's in a research note

after the announcement. 

Barclay's added "incrementally, the MPC appears more confident than in August,

which together with lower trend growth, suggests it is ready to react even to

smaller upside surprises than in the past."

     While sterling rose following the September rate announcement, it has since

slipped back to the levels seen prior to the decision and expectations of hike

have slipped from post meeting highs of around 91%. MNI's sterling PINCH

indicator now prices in an 87% chance of hike in November, compared to 40% prior

to the meeting. 

In a research note following the ONS announcement of a revision higher in Unit

Labour Costs Barclay's kept their assessment that despite higher labour costs

"with wage growth showing no signs of drifting higher, the cost argument put

forward by the MPC to support a possible rate hike appears fragile."

     Samuel Tombs, chief economist at Pantheon Macroeconomics, told MNI "there

is at least one closet dove on the Committee who didn't agree with the majority

that interest rates likely will rise "over the coming months" and who hasn't

revealed their identity yet.

     Tombs noted that the TSC meeting will be the first time that both Ramsden

and Tenreyro have spoken on the record since being appointed to the MPC.

     "We suspect that at least one of them will set out the case -- a convincing

one, in our view -- for keeping interest rates on hold until next year," he

said.

     Brexit will once again be a prominent feature of the TSC hearing. In his

time at the Treasury, Ramsden was part of a team that produced projections of

the economic impact of Brexit, predicting that the UK would fall into a

recession quickly after a vote to leave. Tenreyro was also an opponent of Brexit

and was one of the 280 signatories of a letter by economists warning of the

negative impact from a leave vote.

--MNI London Bureau; +44 203 865 3809; email: kieran.williams@marketnews.com

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MC$$$$,M$$BE$]