MNI POLICY: BOE MPC Leaves Policy On Hold, Cuts GDP F'cast>

-MPC Votes 7-2 For Unchanged Policy At January Meeting

-MPC Lowers Cuts Potential Supply Growth, Lowers Growth Forecast

     MNI (London) - The Bank of England kept policy unchanged at its 

January meeting, with only Jonathan Haskel and Michael Saunders, the 

same two members of the nine strong Monetary Policy Committee who voted 

for a 25 basis point rate cut in November and December, backing easing. 

     Collectively, the committee hinted that easing may still be 

required to reinforce the recovery and that future tightening 'might be 

needed', leaving the door open for policy to move in either direction in 

future.

     The following are key points from the minutes, the Monetary Policy 

Summary (MPS) and the Monetary Policy Report (MPR):

     -Ahead of the meeting analysts were split over whether the MPC 

would cut and the most common response was that there would be at least 

one more member backing a cut. In the event, neither of the two 

independent members, Gertjan Vlieghe and Silvana Tenreyro, who had 

expressed conditional support for easing, chose to vote for a cut.

     -A key factor behind the decision not to ease was that the data 

post December's general election had shown evidence of increased 

business confidence and diminished uncertainty. While MPC members are 

waiting to see whether this translates into a significant improvement in 

activity, the majority view was that they could wait-and-see.

     "International developments had been positive and the most recent 

UK data supported the forecast of a near-term recovery in growth," the 

minutes said. 

     -The policy guidance saw the previous "limited and gradual" 

tigthening line dropped and replaced with wording that left the door 

open to policy shifting in either direction. "Policy might need to 

reinforce the expected recovery in GDP growth," if more positive data 

was not sustained but further ahead if the economy recovers "some modest 

tightening of policy might be needed," the Monetary Policy Summary 

stated. 

     -The projections in the quarterly Monetary Policy Report showed 

inflation moving above target on the assumption of one 25 basis point 

rate cut and below target throughout the three year forecast horizon on 

unchanged policy.

     On the market rate assumption CPI was shown falling to 1.53% by Q1 

2021 before rising to 2.01% by Q1 2022 and 2.15% by Q1 2023. On constant 

rates, inflation falls to 1.44% in Q1 2021 and rises to 1.87% in Q1 2022 

and 1.99% in Q1 2023. 

     The last time the projection on constant rates was 'below target' 

for the entire forecast period was May 2009.

     Those projections leave it open to judgement whether easing will be 

required.

     -MPC members noted the decline in core domestic inflation, with 

domestic services inflation easing. Bank economists are looking into the 

reasons behind this -- with various possibilities including a squeeze on 

margins in the retail and other consumer facing sectors or a decline in 

non-wage costs.

     -Strikingly, in its supply side stock take the MPC cut potential 

supply growth to just 1.1% from 1.5%, as highlighted in the MNI BOE 

Preview. The impact of this was offset to some degree by the assumption 

that at present the ouput gap, excess demand over excess supply, was 

wider at -0.5% of GDP compared to the previous -0.25% estimate.

      The Bank attributes this to a mix of the hits of Brexit and the 

lower trend growth seen since the financial crisis, with the effects 

tricky to disentangle.

     -Calendar year growth for 2020 was cut to 0.75% from 1.25% in the 

November report, with 2021 cut to 1.5% from 1.75%, largely as a resut of 

a reduction in potential supply-side.

--MNI London Bureau; tel: +44 203-865-3812; email: 

david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]