MNI BOE WATCH: On Hold In December, Gradualism Dominant
MNI (LONDON) - The Bank of England is set to leave Bank Rate on hold at 4.75% at its December meeting in what is likely to be an 8-1 vote, with Swati Dhingra the only Monetary Policy Committee member expected to favour a cut.
The MPC made its second cut of the cycle in November but emphasised gradual easing compatible with its central scenario and aligned with cutting once a quarter in 2025. Recent comments by MPC members, most notably at the Dec 19 Treasury Select Committee hearing, have highlighted continuing differences of view, though with Governor Andrew Bailey crucially tilting away from faster easing towards the centrist, gradual approach.
In BOE communications, MPC members identify their views against three scenarios for inflation. A dovish scenario posits continued disinflation as the effects from the energy price shock fade, a hawkish scenario assumes persistent elevated inflation due to structural changes, and a gradualist, middle scenario requires restrictive rates to bring inflation sustainably back to target. (See MNI POLICY: BOE Braces For Trump Impact Without Scenarios).
Now that, since November’s policy decision, recent MPC joiners Deputy Governor Clare Lombardelli and independent Alan Taylor have set out their thinking for the first time, there seems to be a clear majority for a gradualist approach.
One member, Catherine, Mann is in favour of leaving the policy rate high-for-long before eventually cutting swiftly.
Lombardelli, Chief Economist Huw Pill and Megan Greene, are all gradualist but concerned about the upside risk of more persistent inflation pressures. Taylor and Deputy Governor Dave Ramsden are gradualist but open to faster cuts.
Asked what the gradual scenario would mean for rates, Taylor told the TSC that it would imply 100 basis points of cuts over the next year. But, he added, "If conditions are weaker—and my own views skew to the downside risk now versus the upside risk of about a year ago—we could go more quickly."
BAILEY BACK IN THE CENTRE
Lombardelli came out against faster easing, telling the TSC and a BOE Watchers event that while she saw inflation risks as broadly balanced she was more concerned about the upside inflation risks from structural change.
Bailey, meanwhile, has shifted back to the centre, making clear he is in no rush to accelerate easing and telling the TSC "I am very close to where Clare is ... if you had asked me this question a month or so ago, I would have probably been a bit closer to where Alan is.”
Deputy Governor Sarah Breeden's position is less clear, but seems to tilt dovish.
A key factor for MPC members will be focussed on is the response by firms to the October Budget’s twin hit of a rise in employer taxation, through National Insurance Contributions, and another increase in the National Living Wage. (See MNI INTERVIEW: UK Minimum Wage Hike Poses Jobs, Prices Risk)
The BOE's survey found a narrow majority of firms expected to hike prices in response to the NICs rise but also found downside risks to employment. The minutes may shed some light on this ahead of February's annual supply side stock-take. (See MNI INTERVIEW: UK Minimum Wage Hike Poses Jobs, Prices Risk)