MNI BOE WATCH: MPC To Split, Likely Opt For 50bps Hike

The Bank of England is widely expected to settle on a 50-basis-point hike at its December meeting, but the nine-member Monetary Policy Committee will split, with two of the external members leaning towards a smaller hike or no hike at all, and one or two votes possible for 75 basis points.

When the MPC raised Bank Rate by 75 basis points to 3.0% in November seven members backed the move, with two dovish dissents from externals, as Swati Dhingra voted for 50bps and Silvana Tenreyro for 25bps. Dhingra has subsequently warned of the risks of over-tightening while Tenreyro has made clear that for her 3% could be the peak, suggesting that both will dissent dovishly in December. The majority, though, is centred on insiders, boosting the chances that the Committee will coalesce around 50bps.

Bank insiders Governor Andrew Bailley, Deputy Governor Ben Broadbent and chief economist Huw Pill are all plausible candidates for supporting 50bps and could obtain a purely insider majority if two other deputy governors, the more dovish Jon Cunliffe and the more hawkish Dave Ramsden, fall into line. External member Catherine Mann has championed the cause of hiking more rapidly to crush inflation expectations and she, together with fellow external Jonathan Haskel, who has highlighted the upside inflation risks from reduced labour market supply, will have to decide if another 50 bps is enough for now or whether to dissent on the hawkish side.

PEAK APPROACHES

The Bank does not typically publish a collective optimal policy path but members have gone further than normal recently in providing clues as to where they think that their own paths may lie. (See MNI POLICY: BOE Points To 4% Peak At Most, Then Rate Cuts)

The collective message delivered in November was that market expectations for Bank Rate to rise as high as 5.25% had been overblown, with Bailey suggesting that the peak was more likely to be nearer 3%. Since then market expectations have eased towards 4.5% bringing the Bank and market pricing closer together.

There is no full forecast round in December and no press conference, so the MPC may steer clear of commenting directly on market pricing. Members will also have to decide whether to stick with current guidance calling for the Bank to “respond forcefully, as necessary” if the outlook “suggested more persistent inflationary pressures.”

As that guidance was created to bring all members on board, by setting out sound central banking principles, it may not need replacing even as the rate peak nears.

Since November, one of the more striking developments has been the further strengthening of sterling. Since its recent trough in the wake of the Sept 23 mini-Budget, sterling has risen near 8.0% on the BOE's effective rate index and is up over 2.5% since the start of November.

The effect of a stronger pound will be offset when the MPC considers financial conditions by the decline in market rates expectations, and the details of the November budget, which the committee will be able to discuss in full for the first time, showing a near-term fiscal easing.