MNI POLICY: Cracks On MPC But Gradualism Holds, Bailey Nuanced
MNI (LONDON) - There is less to an apparent divide between the governor of the Bank of England and his chief economist over the potential pace of future rate cutting than meets the eye, with both tending towards the central view on a cautious Monetary Policy Committee that Bank Rate needs to remain restrictive and only fall gradually over time.
The pound fell after comments by Governor Andrew Bailey in an interview published on Thursday that it could become a “bit more activist” if inflation continues to decline, before recovering some losses the following day as Huw Pill warned against cutting rates “too far or too fast” lest it endanger progress towards its 2% inflation target.
But the differences between the two men are more of nuance.
Both lean towards the dominant view on the MPC that the Bank should move gradually as headline inflation declines. This is in line with the second of three scenarios, for how restrictive policy needs to be to keep inflation heading down, set out in the statement after the MPC meeting in September, when Bank Rate was held at 5%.
Whilst Bailey’s most recent comments were made in a newspaper interview, rather than in a speech in which he could precisely frame the context, it seems clear his “activist” comment was conditional on the first, more optimistic scenario, under which inflation dissipates with a lower level of monetary restriction, playing out in practice. However in another interview, just a few days earlier, he had made clear that it was the middle scenario which was more likely, stressing that "we have quite an unbalanced mix of components of inflation at the moment,” and concluding “I do think the path for interest rates will be downwards, gradually.”
PILL SPEECH
Pill was explicit in a speech on Friday regarding his position in relation to the scenarios. He said that while he did not fully subscribe to any one of the three he saw the second as most likely, which is consistent with the gradualist case that "Bank Rate will need to fall over time, but at a pace that ensures sufficient restriction is maintained."
Pill went slightly further, expressing some support for the third, or most hawkish, case whereby "deeper structural changes in the UK economy … impart a more lasting inflationary dynamic," and higher interest rates have to persist.
Current MPC member Megan Greene has also publicly identified with the second, gradualist, scenario, though placing some weight on the third, while the only member so far to clearly break ranks has been Catherine Mann, who expressed some support for the third, or most hawkish scenario. Mann made the case for activism, arguing that rates could be held higher for now on the understanding that they could be cut swiftly once it becomes clear disinflation is dominating.
The communication shift towards setting out MPC members' views against economic scenarios reflects the influence of the recent review by former Fed head Ben Bernanke, in which he championed the alternative scenario approach. (See MNI POLICY: Time Needed For BOE To Make Bernanke Changes)
Some MPC members have yet to speak in relation to the scenarios, with Deputy Govenor Clare Lombardelli busy working on implementing Bernanke’s recommendations and newcomer Alan Taylor yet to make his maiden speech. Swati Dhingra, who voted for a rate cut in September, is clearly in line with the most dovish scenario while Deputy Govenor Dave Ramsden was ahead of the pack in backing easing.