MNI BOE WATCH: MPC On Course For Steady Rate, Smooth QT Policy

MNI (LONDON) - The Bank of England looks set to keep Bank Rate on hold at 5.0% and to announce either a modest increase in or no change to the pace of its reduction of gilt holdings built up through quantitative easing at its meeting on Thursday.

After cutting Bank Rate in August for the first time this cycle, in what it termed a "finely balanced" decision with a five-to-four vote in favour, and with no press conference or fresh forecasts, analysts expect the Monetary Policy Committee to sit tight this month ahead of a widely-expected cut in November.

At least one vote in favour of another cut, from independent member Swati Dhingra, is widely anticipated, but it is unclear whether anyone will join her. Deputy Governor Dave Ramsden has shown an ability to move ahead of colleagues in anticipating the direction of policy, being early to back the first cut, but with markets already pricing in a November rate reduction whether the vote is 7-2 or 8-1 should make little difference to expectations.

The central message from the minutes, in line with Governor Andrew Bailey's Jackson Hole speech, is likely to be that evidence points towards inflation persistence being self-correcting, but that there is plausible case that it could prove more enduring, with individual MPC members assigning differing weights to those two scenarios.

That formulation, along with unchanged, loose guidance, would leave the door open to a November cut without pre-empting the outcome of that month’s forecast round.

PACE OF QT

The MPC is also due to announce the pace at which it aims to reduce gilt holdings in its Asset Purchase Facility over the next 12 months. Given chunky redemptions which would reduce active sales to around only GBP13 billion if it presses ahead at the current GBP100 billion annual pace, it is likely to either slightly accelerate reductions or to at least hold them steady, in line with its objective to avoid surprising markets and to allow quantitative tightening to run in the background.

The Bank has spent a lot of time developing a framework to deliver "ample" reserves through repo operations, which should allow it to continue to reduce its QE gilt holdings smoothly while still meeting demand from commercial banks and others for reserves, so any marked reduction in the pace of reductions would send a confusing signal. (See MNI POLICY: BOE Seeks Low Key QT, No Sharp Pace Change Likely ).

The major central bank event of the week, the Federal Reserve meeting, should be a sideshow for the MPC. On usual timings the MPC will vote on policy on Wednesday before the Fed announcement is made public.