MNI POLICY: Differences Within BOE Focus On Risks To Growth

A further delay to publication of the UK government’s fiscal statement will make little difference to the Bank of England’s calculations ahead of what is likely to be another split decision by the Monetary Policy Committee in November, with members divided over how to weight risks from elevated inflation expectations and falling real incomes and over the optimal pace for hikes.

While Wednesday’s announcement of a delay from Oct 31 to Nov 17 means the Monetary Policy Committee will not have access to the full medium-term fiscal arithmetic for its Nov 3 policy decision, the government’s direction of travel is clear. Chancellor of the Exchequer Jeremy Hunt has reversed GBP32 billion of tax cuts set out in his predecessor's ill-fated Sep 23 mini-Budget, and is set to spell out plans to raise additional revenue to fill a reported GBP35 billion shortfall in order to begin to reduce debt as a percentage of output within the forecast horizon.

Though November’s Monetary Policy Report quarterly forecasts will take fiscal policy as existing at that point as given, MPC members will have an idea of its likely evolution by the time they weigh their votes. The BOE has already been in contact with Treasury officials on the fiscal plan, according to Deputy Governor Dave Ramsden.

RISKS THE FOCUS

MPC deliberations are instead likely to focus on MPC members’ perceptions of the dangers posed by elevated inflation expectations or by the hefty hit to real household incomes. As Deputy Governor Ben Broadbent said in an Oct 20 speech, individual MPC members who assess risks differently from those in the central projection will come to a different conclusion about the most likely path of future interest rates.

Broadbent also said that market pricing for the cycle maximum of Bank Rate is too high. If it peaked at about 5.25% in line with current contracts, the BOE's optimal policy projections indicated it would knock five percentage points off GDP in an already pallid growth environment. Pricing has jumped from only around 3% in August, and at one point hit 6%. (See MNI INTERVIEW: UK Jobs Market Risks "Wile E Coyote" Plunge)

There are also tactical differences within the MPC with regards to the speed at which rates should be enacted.

Hawkish MPC members like Catherine Mann argue for front-loading increases in rates to crush inflation expectations. But in September the MPC split in three over a 50 basis-point-rate hike, with five members backing it, three going for 75 bps and one for 25 bps. A similar split in November is perfectly plausible, with expectations centred on 75 bps, some analysts expecting 100 bps and speculation now mounting over 50 bps.