MNI INSIGHT: BOE Focus On Post Election Data As It Mulls Cut

--Bank Expected Near Flat Q4 Growth; Focus Is On 'Clean' Data That Post Dates

Dec 12 Election

By David Robinson

     LONDON (MNI) - The Bank of England will focus on data collected after the

Dec. 12 general election as it decides whether to cut rates, with the

possibility still open that a bounce in activity or spending plans could

outweigh a recent deterioration in growth.

     While Purchasing Managers Indices due Jan. 24 will be a key release ahead

of the next BOE decision announced Jan. 30, the Monetary Policy Committee will

also take account of other data points, including the CBI's consumer and

business surveys, Deloitte's Chief Financial Officer's survey, and its own

Decision Maker Panel data.

     Two out of nine MPC members voted for easing in December, with Jonathan

Haskel arguing that a pre-emptive cut in Bank Rate from 0.75% would reduce the

chance of hitting the reversal rate, or effective lower bound, which the MPC

estimates to be around 0.1%. This year, two further MPC voters, Jan Vlieghe and

Silvana Tenreyro, have also said a near-term rate cut might be necessary.

     But a key question for the MPC will be whether the ruling Conservative

Party's resounding electoral victory, which has ensured the passage of Brexit

legislation through parliament, will result in a substantial boost to business

or consumer activity, MNI understands.

     Business and household surveys will provide an initial read as to the

post-electoral economic temperature by the end of January, Vlieghe said in a

Financial Times interview published Saturday, in which he opened the door to a

rate cut at the next MPC meeting. In remarks at the Resolution Foundation,

Tenreyro suggested that she could wait a little longer than that to see how

things unfolded "over the coming months."

     --EXPECTATIONS A POOR GUIDE

     The PMI data will be scrutinised by investors looking to anticipate the

MPC's reaction, but members are aware that it is an imperfect guide to the

performance of the economy as a whole, with a correlation between the composite

index and official activity data of about 0.6 or 0.7. The MPC has been burnt

before by excessive reliance on the PMIs, whose sharp deterioration following

the June 2016 vote to leave the EU influenced its pre-emptive easing, but later

proved to have been a false signal.

     Expectations components within surveys in general are also regarded with

some scepticism, with recent work based on the CBIs from former MPC member

Martin Weale highlighting how poorly businesses' expectations serve as a guide

to the economic future.

     Both Vlieghe and Tenreyro spoke before data showed gross domestic product

expanded by 0.1% in the three months to the end of November compared to the

preceding three-month period, less than expected by investors. But while neither

will have seen the data before their remarks, it was in line with the view

expressed in the MPC's December minutes, which cited Bank staff as expecting GDP

growth of 0.1% in 2019 Q4.

     The Bank has also invested heavily in state-of-the-art nowcasting, allowing

staff to provide the MPC with growth estimates in close to real time.

     Monetary policy theory could also play a decisive part in the MPC's

upcoming debate, in particular the argument that the balance of risks is

asymmetric nearer to the lower bound, and that too much stimulus can be more

easily reversed than too little.

     BOE Governor Mark Carney referred to this thinking in a Jan. 9 speech,

mentioning that "There are arguments for the 'risk management' approach

advocated by Charles Evans among others .. This approach calls for easing policy

more aggressively than would be prescribed by the central outlook for activity

and inflation when policy rates are close to their lower bound."

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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