MNI BOE STATE OF PLAY: MPC Split, Majority Sees Near-Term Hike

--Votes 7-2 For Unchanged Bank Rate; Saunders, McCafferty For 25bps Hike

By David Robinson and Jamie Satchithanantham

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

September contained a new line that monetary policy was likely to be tightened

in coming months, which divided the MPC but was backed by the majority.

     If the economy evolves as the MPC is forecasting, with subdued growth,

diminishing slack and elevated inflation, a near-term Bank Rate on a split vote

now looks the most plausible outcome.

     In August the MPC members warned that policy could have to be tightened by

more than market curves were implying but at the time that line failed to shift

expectations. In the September minutes the MPC took it a step further,

introducing a timeframe at the cost of splitting its membership.

     "A majority of MPC members judged that if the economy continued to follow a

path consistent with prospect of a continued erosion of slack ... some

withdrawal of monetary stimulus was likely to be appropriate over the coming

months in order to return inflation sustainably to target," the minutes said.

     Market rate expectations had been brought forward since August. When the

MPC met in September, they showed a rise in Bank Rate, as implied by the UK OIS

forward curve, in eight or nine months time.

     Despite markets having brought forward the timing of the first hike and

raised the yield curve the MPC again warned that "monetary policy could need to

be tightened by a somewhat greater extent over the forecast period than current

market expectations".

     The MPC's last full set of economic forecasts in the August Inflation

Report showed growth running below historic averages and settling at a pace

around 0.4% quarter-on-quarter. Inflation, however, was projected to remain

above the 2% target throughout the three-year forecast horizon.

     The minutes said that there were considerable risks to the outlook

including those around Brexit, with questions over how households, businesses

and financial markets react to the process of EU withdrawal.

     The Bank has enhanced its monitoring of the impact of how Brexit is

influencing business expectations by setting up its Decision Maker Panel, a

large scale CFO survey. The MPC emphasises that what matters is how consumers

and firms see Brexit evolving rather than its own expectations of how it will

actually unfold.

     UK gross domestic product grew by 0.3% q/q in Q2, in line with the MPC's

own forecasts. The September minutes highlighted how one-off effects had pushed

down on growth in the second quarter with a large chunk of the weakness in

household consumption due to a fall in car sales which could be at least

partially reversed in Q3.

     The MPC previous forecast was for 0.3% q/q in Q3 but the minutes suggested

that this may be revised up.

     "Early indicators were consistent with a somewhat stronger profile for

consumption growth in Q3 than had been incorporated in the (August) Inflation

Report," said the minutes.

     "A majority of MPC members judged that if the economy continued to follow a

path consistent with prospect of a continued erosion of slack ... some

withdrawal of monetary stimulus was likely to be appropriate over the coming

months in order to return inflation sustainably to target," the minutes said.

     For those two members backing an immediate hike, there was scope to reverse

it if subsequent events warranted a change in stance. The majority, however,

argued that it was too soon to judge whether the potentially stronger

consumption growth would be enough to offset continuing weak business investment

and that they were still awaiting a sustained pick-up in wage growth.

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

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