MNI BOE WATCH: Set For March Hold, Mann's Vote The Wildcard
MNI (LONDON) - The Bank of England is virtually certain to keep its policy rate on hold at 4.5% at its March meeting this week, with guidance adopted in February for "a gradual and careful approach" to further easing likely to stay in place.
The Monetary Policy Committee voted seven-to-two for February’s 25-basis-point cut, with two members, Swati Dhingra and Catherine Mann, backing a 50bp reduction. The details of March’s vote split are uncertain, though with the previously more dovish Deputy Governor Dave Ramsden and external member Alan Taylor citing two-sided risks in recent remarks a commanding majority in favour of no change looks highly probable.
While Dhingra is likely to opt for at least another 25bp cut, it is harder to predict the vote by Mann, who champions policy activism and rejects the gradualist guidance. In a speech at the Reserve Bank of New Zealand on March 6, Mann warned of the risks of both taking the policy rate much lower, stating that "the need to remain restrictive is particularly important", and of the danger of a rapid worsening of the real economy as firms offset the extended build up in labour costs by cutting jobs, driving up unemployment and eroding consumer demand.
Mann could make the case, given the downside risks and recent financial market volatility, that a larger cut is justified, though most analysts expect her to opt for a 25bps cut.
CAUTIOUS MAJORITY
The majority view on the MPC is that while the underlying disinflation process is continuing, caution is warranted given that headline inflation set to rise still further above target in the near term, amid higher regulated prices for water and energy and still-elevated earnings growth. (See MNI INTERVIEW: R* At Top Of BOE Range And Rising - NIESR Head)
"If it was one of those shocks, 0.1% here or 0.2% there, you would be quite relaxed about looking through. When it is five or six of them ... you feel a little more cautious about looking through all of them at the same time," Taylor, who had previously raised the possibility of rapid easing, told the Treasury Select Committee on March 5.
Governor Andrew Bailey endorsed Taylor's view at the TSC meeting, pointing to two-sided risks and warning of "the hangover effect" from the last inflation shock, as the public may be more likely to anticipate persistent higher inflation.
With no new forecast round until May, inflation picking up and cautious guidance in place, Thursday’s announcement is not expected to bring any new significant steer for the direction of future policy, with markets pricing in little more than two more 25bp cuts in 2025. (See MNI POLICY: BOE, ECB Probe Whether QT Can Lower R-Star)