MNI BOE WATCH: Financial Conditions Add To Case For No Change

The Bank of England has gone into its March meeting having sent no signal to disturb market pricing which suggests that the Monetary Policy Committee is set to decide between leaving Bank Rate unchanged at 4.0% or hiking by 25 basis points.

Both the Bank's previous forecasts for a substantial undershoot of the inflation target by the second quarter of 2024 and Governor Andrew Bailey's recent remark that economic developments have been broadly in line with expectations made clear that unchanged policy was an option this month. Turbulence following bank failures has seen money markets and analysts mark down their views of the likely rate move, and indicate a roughly 50% probability of a hold, although surveys show a majority of the latter still anticipate a 25bp hike. (See MNI POLICY: BOE On Course For Hold Unless Data Surprise)

Before the recent volatility, which pushed rate curves lower and raised the spectre of tighter credit conditions, there was a strong case for the MPC to split four ways, with all four of the independents alone taking different positions.

SIlvana Tenreyro had opened the door to backing a cut, Swati Dhingra seemed comfortable with no change, Catherine Mann, who has favoured swift tightening to crush inflation expectations and ensure tightening in financial conditions, could have opted for a 50bp hike and Jonathan Haskel, who has highlighted the weakness of UK labour supply, may have gone for 25bps.

Now, the lowering of the rate curve could push Tenreyro towards unchanged while the risk of tighter credit conditions could tilt Mann towards a smaller hike.

INSIDERS KEY

Five Bank insiders hold the balance of power on the nine-member MPC and of these Deputy Governors Ben Broadbent, Jon Cunliffe and Dave Ramsden have all steered clear of public commentary ahead of this meeting. Market pricing compatible with either of the two likely outcomes will now provide a comfortable backdrop for the meeting.

Chief Economist Huw Pill has stressed that the MPC needs to be ready to act to address persistent inflation but he has also noted the advantage of waiting until the May meeting, by which the time the Bank will have completed a full quarterly forecast round.

Broadbent, deputy governor for monetary policy and whose comments tend to reflect the common ground of committee thinking, has, not for the first time, kept his cards close to his chest.

FINANCIAL CONDITIONS

It will be far from straightforward for the MPC to assess changes in financial conditions. The Bank has its own Monetary and Financial Conditions Index, which factors in lending spreads, equity prices and the like, but does not publish it, while Mann is championing a new index. (See MNI INTERVIEW: BOE Should Set Out Views On Policy Transmission)

Recent whipsawing in equity prices and banking turbulence will also make it harder to separate signal from noise.

The MPC will have received February inflation data, scheduled for a March 22 release, early, though rules limit internal circulation, restricting full analysis and adding to the case for not placing great weight on one month's figures.