MNI POLICY: BOE On Course For Hold Unless Data Surprises

Assuming the UK economy continues to perform “much as expected,” the Bank of England is likely to leave policy on hold at its March meeting as it awaits its May forecast round in order to make a more comprehensive assessment of developments and the likely impact of tightening.

With the Monetary Policy Committee’s external members already having made their positions clear, and no public events currently scheduled for the five insiders ahead of the March 23 decision, the key steer for the meeting is a March 1 speech by Governor Andrew Bailey in which he said that while nothing has been decided the MPC no longer presumes further hikes will be required. (See MNI INTERVIEW: BOE Should Set Out Views On Policy Transmission)

Nonetheless, while Bailey said “the economy is evolving much as we expected it to," he stressed there were more data to come and that he would caution against assuming that hiking was over. Key Indicators ahead of the meeting include GDP on Friday, labour market data next Tuesday and CPI on March 22, the day of the policy vote, though the MPC typically downplays the importance of any single such metric in making its decisions. So far, surveys have suggested little danger of upside surprises from the labour report, with REC data showing wages flat at elevated levels.

MEDIUM-TERM UNDERSHOOT FOR CPI

In its February forecast round the MPC projected CPI inflation undershooting the 2% target by some distance in the medium term, falling on the market interest rate projection to just 1.0% in two years' time and to 0.4% at the end of the three-year forecast. A similar undershoot was shown even if Bank Rate were to be left on hold.

The forecasts came with a large upside skew to reflect the risk of more persistent inflation and one reading was that the data would need to surprise to the upside to justify further tightening.

While volatile market curves have frequently priced at least two more increases in Bank Rate from the current 4.0%, the Bank’s own survey of market participants, which it uses to help filter out market noise and which garners anonymous responses from, among others, analysts who do not make their work public, including those at large hedge funds, has consistently pointed to lower expectations.

The February MaPS survey showed the 50th percentile saw 4.25% as peak and the 75th percentile saw it as 4.5%. With just one further 25bp hike expected, or two at most by a substantial majority, whether the MPC delivers a hike in March or waits and delivers it alongside its next forecast round in May, market participants are unlikely to be surprised.

The participants have attributed around a quarter of the gap between their views and sterling market interest rate curves to liquidity and other technical factors, while linkages with dollar curves are complex. The Bank has not pushed back against market expectations, which may in part reflect the view they are not that far out of line, although the next MaPS survey will only be published after the March decision.