MNI BOE WATCH: Narrow Path To Aug Cut, Wary Messaging Likely

MNI (LONDON) - The voting path to an August rate cut by the Bank of England's Monetary Policy Committee is tight and the messaging over future cuts, whether policy is eased or not, is likely to be cautious.

Most analysts expect a 25 basis point cut although money market pricing suggests only a 50/50 chance of a move, with the limited public communications from the Bank highlighting both the uncertainty and likely tightness of the vote (see MNI POLICY: Path Narrows To August BOE Rate Cut). 

Since the previous meeting in June, when two members backed a cut and some, assumed to be three, of the other seven who backed unchanged said the decision was "finely balanced", the Bank has not moved the policy dial decisively one way or the other.

Deputy Governor Ben Broadbent, thought to be one of the three who saw a cut as a close call, has left the MPC, entailing that there is no in-built majority from June that is tilting to easing. None of the three independent members who were skeptical of the case for a cut, citing high levels of services inflation and wage growth surpassing model-based estimates, looks likely to have changed their views. 

HAWKS

Jonathan Haskel explicitly made the case for keeping policy on hold, Catherine Mann has spearheaded the more hawkish case and Megan Greene has previously been explicit about her concerns over elevated core inflation (see MNI INTERVIEW: Supercore Shows Benign UK Disinflation Feasible).

A combination of a purdah period due to the June election and thin communications from the Bank after it left Huw Pill, the Bank's chief economist, as the only MPC member without a previously well-known position to speak publicly between the two meetings (see MNI POLICY: BOE's Pill Holds August Rate Cut Trump Card). 

In his July 10 speech and subsequent Q and A, Pill left the door ajar to backing a cut, saying that he was in none of the policy camps, but he added some hawkish twists saying, for example, that, at the margins, recent news on key indicators of inflation persistence had hinted at upside risks. 

INCOMER

If Pill were to vote for unchanged policy that would need Clare Lombardelli, Broadbent's replacement and a former top Treasury official and OECD chief economist, voting for a cut at her first meeting to secure easing. In the absence of any comments from her since joining the MPC, speculation about her vote is little more than guesswork.

Analysts who predict a cut are divided between those anticipating a 5-4 vote in favour of a cut, with Pill against and 6-3 with Pill in favour. Given the divisions on the MPC and the continuing concerns over inflation persistence, any guidance is likely to be wary, repeating the line about the need to keep policy restrictive and with the little steer over the scope for future cuts.

Governor Andrew Bailey will also, doubtless, face questions over the implications of the 5.5% average public sector pay rise announced Monday and he may well be asked about how much confidence should be placed in the forecasts, after the Bernanke Review highlighted shortcomings in the Bank's process.