MNI BOE WATCH: Bank Delivers 'Finely Balanced' Rate Cut

MNI (LONDON) - The Bank of England's Monetary Policy Committee delivered a 25 basis point rate cut at its August meeting on the narrowest of margins, a five-to-four vote in favour, with even some of those who voted for it saying that their decision was "finely balanced."

Chief economist Huw Pill and three external members opposed the cut that took Bank Rate to 5%, while Governor Andrew Bailey, his three deputies including Clare Lombardelli at her first meeting and external member Swati Dhingra all backed it. 

The minutes highlighted how MPC members had two different stories about the likelihood of inflation persistence, with one narrative stating that as the supply and energy prices shocks faded inflation would fall below target and stay there and the other about how second round effects, of higher wages and price expectations, had become embedded in the system. (see MNI POLICY: Path Narrows To August BOE Rate Cut)

Bailey said that the story of more persistent inflation was a "proto-type" alternative scenario and it was reflected in the Bank's forecast. On market rates the modal, or most likely projection, was for inflation to fall to 1.7% two years ahead and 1.5% three years out but the MPC added an upside skew, of 0.3 percentage points to reflect the risks of more persistent inflation, suggesting that it could still be at rather than below the 2.0% target two years out.

BERNANKE REVIEW

While the BOE had previously accepted in full the recommendations of former Fed Governor Ben Bernanke in his review to develop alternative scenarios and overhaul the central model and ditch the assumption that inflation expectations revert to target, at the press conference Lombardelli acknowledged the sheer scale of work involved and  the sketched out greater inflation persistence story was only a step towards implementing the Bernanke recommendations.

Bailey stressed at the post-decision press conference that he was not offering guidance on whether there would be further cuts in the months ahead with the MPC sticking to a meeting-by-meeting approach. Following the decision, market pricing put around a 1-in-4 chance on another cut in September.

Bailey noted that UK growth had been markedly stronger than the Bank expected in recent months but said that "does add to the risk that inflation could be higher than we expected" and warned against cutting "interest rates too much, too quickly" with service and domestic inflation easing but still elevated.,