MNI POLICY: BOE's Pill Holds August Rate Cut Trump Card On Split MPC

MNI ((MNI) London) - MNI (LONDON) - The Bank of England’s Monetary Policy Committee is nearly certain to deliver another split vote at its August meeting with Chief Economist Huw Pill, who speaks on Wednesday, possibly holding a trump on whether it cuts rates though he may keep his cards close to his chest for some time longer.

With at least two votes for a cut apparently assured among the nine-member MPC, there has been speculation that Governor Andrew Bailey, together with Deputy Governors Sarah Breeden and Ben Broadbent, were among those reported by June’s minutes to be tilting to a cut. Now that Broadbent’s MPC term is over, and with Jonathan Haskel making clear in a speech on Monday that he thinks that August will be too early to ease, that leaves the previously sceptical Pill in a position to tilt the scales.

Deputy Governor Dave Ramsden and Swati Dhingra both backed a cut in June, and markets currently price in a roughly 65% chance of a rate reduction next month. However even if Pill has begun to lean towards a cut, as chief economist he may think it more appropriate to avoid giving a clear steer before the quarterly forecast round, which is only revealed at the August meeting. (See MNI POLICY: Models, Forecasts Out Of Focus As BOE Tilts To Cut)

Of those members, thought to be four, who were less inclined to cut at the June meeting, three considered that "more evidence of diminishing inflation persistence was needed before reducing the degree of monetary policy restrictiveness," according to the minutes. One -- perhaps Pill -- was more agnostic.

For those members, thought to be three, who were less inclined to a cut at the June meeting, "more evidence of diminishing inflation persistence was needed before reducing the degree of monetary policy restrictiveness," according to the minutes.

Adding to the challenges of anticipating the BOE’s policy moves, there is no consensus on the Committee as to which indicators or models are best for determining inflation persistence. (See MNI POLICY: BOE Split Over Measures Of Inflation Persistence)

NO AGREEMENT ON PERSISTENCE INDICATOR

In his speech explaining why he thinks it is too early to cut, Haskel pointed to a model developed by former Fed chief Ben Bernanke and former IMF chief economist Olivier Blanchard which indicates that growth in real wages and inflation expectations are key for determining the likely persistence, even though the inflation surge beginning in 2021 was initially caused by supply shocks.

Other MPC members are likely to highlight varying signals from different measures and models of inflation persistence, and some City economists are already trying to track progress against a range of indicators as they try to reproduce the Committee’s thinking.

While the quarterly projections will provide a view of future inflation, the recent Bernanke report into the BOE’s forecasting highlighted how little of a role its central DSGE model plays for the MPC, with the different members favouring various side models. New Deputy Governor Clare Lombardelli, who is responsible for implementing the Bernanke recommendations, only started work last Monday, with an update expected at year-end.

Economists from outside the Bank have suggested that it publish a supercore inflation measure to make its thinking clearer, but, while BOE economists do use measures of core services inflation in their analysis, it seems unlikely that it will do so.

August’s meeting will see the conclusion of Haskel’s MPC term.