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--MPC Not Split Into Firm Hawk/Doves Camps; Rate Cut On The Table
--Recent Comments From Carney, Haskel Highlight How Fresh Data Could Tilt Scales
By David Robinson
LONDON (MNI) - A Bank of England cut is on the table, with no entrenched
dove or hawk camps within the Monetary Policy Committee, and members currently
supporting no change to rates prepared to shift towards easing should data
While the December MPC meeting saw a seven-to-two vote in favour of
unchanged policy, with only Jonathan Haskel and Michael Saunders voting for a
25-basis-point cut, the signs are that MPC members would all attach some weight
to the case for a precautionary reduction in the 0.75% policy rate. A cut would
act as insurance to boost the economy, with the effective lower bound, which the
committee estimates at just above zero, close.
Equally, members also all appear open to leaving policy steady should the
In a speech on Thursday, Governor Mark Carney sketched out cases for both
pre-emptive easing and keeping Bank Rate unchanged while stressing the
importance of upcoming data and underscoring that the debate is finely balanced.
Uncertainty over the economic outlook is fuelled by scant evidence on how
business and consumers will respond to the elimination of the risk of an
imminent no-deal Brexit. While manufacturing purchasing manufacturing surveys
suggest global economic activity may have troughed, the UK has been going
through a soft patch and there is still little clarity over the final shape of
the trading relationship with the EU.
In favour of policy easing, Carney noted that "there is a modest but rising
degree of spare capacity in the UK and core inflation remains subdued. There are
downside risks from global growth and the possibility that uncertainties over
future trading relationships could remain entrenched."
"With the relatively limited space to cut Bank Rate, if evidence builds
that the weakness in activity could persist, risk management considerations
would favour a relatively prompt response," Carney said.
But, on the other side of the debate, he said "global growth is showing
tentative signs of stabilising .. Past global monetary policy stimulus is
gaining traction and global financial conditions are supportive. Early
indicators .. suggest that there has been some reduction in Brexit-related and
domestic policy uncertainties."
MPC member Silvana Tenreyro, one of the seven who has so far backed
unchanged policy, said Friday she would be inclined to cut if downside risks to
the Bank's assumption of a smooth transition to a new trading relationship with
the EU and a recovery in the global economy crystallise.
"The risks to those assumptions are largely to the downside and if
uncertainty over the future trading arrangement or subdued global growth
continue to weigh on UK demand then my inclination is towards voting for a cut
in Bank Rate," she said.
But at the same time members are alive to the possibility that there will
be at least a temporary boost from the perception of a diminution of domestic
political risks and the possibility of improving global economic conditions.
"In my view, the current data and weak near-term forecast is enough to
justify a cut," Haskel said in a Dec. 20 speech at the Resolution Foundation,
before spelling out a raft of factors that could persuade him to change his
These included the conclusion of U.S.-China trade talks and more rapid than
expected progress on EU-UK negotiations, with the resulting fall in uncertainty
putting gradual hikes back into contention.
To add to the complexity facing the MPC, members have repeatedly stressed
that the hit from Brexit-related uncertainty has to be treated as both a supply
and demand side shock, with its overall impact dependent on the relative
magnitude of the effects and its impact on sterling.
As part of its forecast round leading up to this month's meeting, with the
policy decision to be unveiled on January 30, the MPC will carry out its annual
stocktake on the supply side.
"This assessment is particularly relevant as evidence is increasing that
the entrenched uncertainties in recent years may have weighed more heavily on
supply growth than previously anticipated," Carney said.
That has potentially inflationary consequences, suggesting that potential
growth may be even lower than previously thought, as MNI has previously
The outcome of the January, and subsequent meetings, appears less certain
than the current seven to-two split suggests, with the weight of the committee
quite capable of shifting rapidly either way.
--MNI London Bureau; tel: +44 203-586-2223; email: email@example.com
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