MNI BOE WATCH: 25bp Hike Expected, Eyes On "Table-Top" Policy

The Bank of England is widely expected to hike by 25 basis points to 5.5% at its September meeting, but the Monetary Policy Committee will struggle to reach agreement over any signal that the policy rate is around its peak level and that it is likely to stay little changed for a significant period.

While the BOE’s minutes are likely to reflect some support for the so-called “Table Mountain” or “Table Top” approach, the policy statement is unlikely to do more than signal the concept in a loose form. While Chief Economist Huw Pill has expressed support for a Table Mountain approach and independent MPC member Swati Dhingra told the Treasury Select Committee that the “trade-off between how high we go and the duration of staying high is fundamental,” Catherine Mann, another independent, has warned against signalling flat policy. (See MNI INTERVIEW:Flat Rates Fit With Data Dependence-ExBoe's Bean)

Holding rates constant at current levels risks extending excessive price rises, Mann said in a Sept 11 speech, pointing to what she was said was an increasing inflation risk premium priced into the UK’s macroeconomic prospects.

In August, the MPC agreed on loose guidance that acknowledged that the policy rate was in restrictive territory and stated that it would remain “sufficiently restrictive for sufficiently long to return inflation to the 2% target sustainably.”

The MPC vote then was split, with six members backing the 25bp hike and two, Jonathan Haskel and Mann, opting for 50bp, with Dhingra going for unchanged. This time the vote will almost inevitably be split once more, with Dhingra at least calling for no change, and while the collective guidance could possibly be kept, the minutes are likely to set out individual members’ preferences for a Table Mountain approach or otherwise.

ASSET SALES

The MPC will also vote at this week’s meeting on the target for reducing the stock of gilts built up during quantitative easing over the next 12 months.

In September last year the MPC voted to reduce the stock of gilts by GBP80 billion, and Deputy Governor Dave Ramsden, responsible for the Bank’s balance sheet, stated in a speech back in July that he saw “potential to increase slightly the pace of gilt stock reduction,” largely due to a heavier redemption profile in the coming year.

Ramsden’s argument was that there has been no evidence that quantitative tightening has disrupted market functioning and that while there was an effect on yields it was less marked than during QE. A step up in the pace of gilt stock reduction to around GBP90-100 billion in the year ahead would come as no surprise to markets.