MNI BOE WATCH: Fiscal Squeeze Weighs On Scale Of Hike

The Bank of England is widely expected to announce a 75-basis-point rate increase on Thursday after its November meeting, with a fiscal squeeze and Bank projections that market pricing has overblown the amount of tightening required in this cycle reducing the chances of a larger hike.

Another fragmented Monetary Policy Committee vote looks likely, following the three-way split over September’s 50 bps hike, though with more of a bias towards smaller rather than larger increases.

On the hawkish side, independent member Cathy Mann has advocated front-loading hikes. The UK labour market remains tight, and fellow MPC member Jonathan Haskel, who has highlighted the hit to labour supply from extensive long-term sickness, is unlikely to shift his views after backing 75 bps in September.

Other members will place greater weight on the potential deflationary effects of what looks like being a prolonged period of economic contraction or, at best, flat growth. Swathi Dinghra, who voted for 25 bps in September, could opt for the same again. Deputy Governor Ben Broadbent has indicated that market expectations for hikes over this cycle are overblown, noting that, if, as recent pricing suggested, Bank Rate rose to 6% from the current 2.25%, it would result in a five—percentage-point hit to GDP. Expectations have since scaled back to around 4.5%. (See MNI POLICY: Differences Within BOE Focus On Risks To Growth)

BUDGET DELAY

The delay until Nov 17 of the government’s Medium-Term Fiscal Plan, originally planned for Oct 31, should have little effect on the vote, given that MPC members have already engaged with Treasury officials and are aware of the broad direction of policy under new Chancellor Jeremy Hunt. It could, though, dilute the importance of the BOE’s quarterly forecasts, which have to take current fiscal policy as given.

Speculation ahead of the fiscal plan focusses on the extent of spending cuts and tax hikes necessary in order to put the budget on course for balance and the debt-to-GDP ratio on the road to decline in Office For Budget Responsibility projections. Unfunded tax cuts in Sept 23’s mini-budget sparked a gilts sell-off, prompting first BOE intervention and then a sharp policy reversal under the new chancellor.

Various reports have anticipated a fiscal deficit between GBP30 billion to GBP50 billion, though this range reflects Treasury officials’ sense of the margin they have in achieving their fiscal goals.

While the MPC will discuss interest rates, it will not need to revisit its decision to schedule GBP40 billion of gilt sales at the meeting.