MNI BOE WATCH: Split MPC Seen On Hold For Second Time

The Bank of England is likely to announce an unchanged policy rate at 5.25% for a second consecutive decision on Thursday, with Monetary Policy Committee members divided over the risks of tightening too much or too little.

As September’s five-to-four vote suggests, and as BOE Governor Andrew Bailey has said since, MPC decisions are set to continue to be close calls. There are signs, though, that momentum may have shifted towards a high-and-stable for long, “Table Mountain” approach, rather than further hiking.

Of the four MPC members who backed a hike in September, Jon Cunliffe left the Committee on Tuesday, to be replaced as Deputy Governor by BOE insider Sarah Breeden, Megan Greene has yet to make a policy speech and only the other two, Jonathan Haskel and Catherine Mann, have articulated an enduring case for a further hike, arguing that it is better to err on the side of over tightening rather than risk high inflation becoming embedded.

INSIDERS

All other Bank insiders voted for unchanged policy, and the case for pausing may have strengthened, with signs of declining inflation and data pointing to economic output “bobbing around zero”, in the words of chief economist Huw Pill. The labour supply side stock take that could raise the estimated level of unemployment that is compatible with stable inflation from its current 4.1% is not set to be published until February (MNI INSIGHT: BOE Labour Market Stock Take Not Ready Until Feb)

The MPC could stick to its guidance that policy needs to be “sufficiently restrictive for sufficiently long” while leaving the door open to further hikes if there are signs of more persistent inflationary pressure. That formulation both points to high-for-long and facilitates higher market rate expectations if future data surprise to the upside. (MNI INTERVIEW: Credibility Key To "Table-Mountain" Rates Pledge)

LABOUR DATA CONCERNS

The MPC will update its quarterly economic forecasts although the acknowledged shortfalls of the official Labour Force Survey data and the ongoing review of BOE forecasting by former Federal Reserve chair Ben Bernanke will leave Bailey and colleagues with an uphill battle to get forecasts taken seriously.

In reality, there is a lot of labour market analysis that the BOE can get done even with current LFS data. The job vacancies figure, not a part of the LFS, has been the key driver of the easing the unemployment-to-vacancies ratio, and the Office for National Statistics has set out the methodology for adjusting LFS metrics using other real time indicators. (See MNI INTERVIEW: Some Positives In Cloudy UK Labour Data)

As most data have not been far out of line with the August forecasts, the BOE’s modal, or most likely, projection, could show inflation undershooting the 2.0% target at two- and three- year horizons, while retaining the upside skew that draws it conveniently close to target a couple of years ahead.

Breeden, who joined the MPC on Nov 1, has been an attendee at all pre-meeting MPC briefings and will vote in November.