MNI STATE OF PLAY: BOE Fragmenting Over When To Tighten

The minutes of the Bank of England September meeting showed that neither of the newcomers, Chief Economist Huw Pill or independent member Catherine Mann, broke ranks, but they underscored the fragmentation within the the Monetary Policy Committee as its focus shifts to tightening policy.

While only two members of the MPC, Deputy Governor Dave Ramsden and Michael Saunders, voted to end the current round of asset purchases immediately, there was a diversity of views within the majority no change camp. All accepted policy would need to tighten at some stage as the recovery proceeded, but they disagreed over how likely it was that the sharp rise in consumer prices was likely to be temporary or to herald a more sustained period of high inflation.

The Bank's economic analysis stated that "Against a backdrop of robust goods demand and continuing supply constraints, global inflationary pressures had remained strong and there were some signs that cost pressures might prove more persistent."

MPC members in the majority camp, however, were reported to place different weights on the arguments for more persistent inflation. One thing they did agree on was that the outlook for the labour market was exceptionally uncertain.

LABOUR MARKET ANOMALIES

Deputy Governor Ben Broadbent and Silvana Tenreyro have been leading work on the labour market. There are pockets of the economy, such as in transportation, which are seeing sharp earnings growth and high vacancy levels, with suggestions that skill mismatches may be leading to supply constraints that hold back growth.

Against this backdrop one view was that the case for a wait-and-see policy approach had strengthened, and that "there was a high option value in waiting for … additional information before deciding if and when a tightening in monetary policy might be warranted."

Another view was that with inflation likely to head above 4% and risks that high energy prices and supply bottlenecks could end up producing second-round effects, there was increased reason to worry that high inflation would not prove temporary.

While the change in membership of the MPC has yet to produce any notable effects in itself, the more significant factor is that with two members already making the case for tightening and others leaning that way the first hike may be drawing closer.