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

MNI (London)
--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$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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