MNI POLICY: Path Narrows To August BOE Rate Cut

MNI (LONDON) - The path to an August Bank of England rate cut looks to have narrowed, with a low chance of a substantial majority for a reduction and the typically consensus-seeking Governor Andrew Bailey likely to have to cast the deciding vote in the event that the Monetary Policy Committee does opt to ease.

Of the nine-member Monetary Policy Committee, three -- independents Jonathan Haskel, Cathy Mann and Megan Greene -- have set out cases for delay. Chief Economist Huw Pill's July 10 speech looks to have been the final public appearance by an MPC member before the Aug 1 policy announcement, and while his nuanced take led to disagreement among analysts his concerns over inflation persistence suggest he is tending towards the no-change camp.

In his speech, the chief economist said he had yet to be fully convinced by either those arguing that supply side deterioration has fed through into more persistent inflationary pressures or by those who saw signs of a more benign process of disinflation. But in the question-and-answer session afterwards he inclined towards caution, saying that the BOE had to tackle the domestic, persistent component of inflation, and adding that "I think we still have some work to do." (See MNI POLICY: BOE's Pill Holds August Rate Cut Trump Card On Split MPC)

CONSENSUAL APPROACH

If Pill does vote against easing at the August meeting, then any a cut  would almost certainly come on a five-four split, and, with Bailey going last, the governor would have to cast the deciding vote. Bailey was reportedly one of three tilting towards a cut at the June meeting, when two voted in favour of easing, but it is unclear what it would take to finally persuade him, given recent mixed data, and whether he would be comfortable pushing through easing with the rest of the Committee split down the middle, or would rather opt for a delay. (See MNI POLICY: BOE Split Over Measures Of Inflation Persistence)

In the 36 MPC votes over which he has presided, Bailey has never been in the minority and the most fractured of these decisions was a three-way split, with a majority of six. Any decision to ease would also need backing from Deputy Governor Sarah Breeden, who has given no recent update on her policy views, and from new Deputy Governor Clare Lombardelli, who will be only attending her first meeting.

Bailey's predecessors as BOE governor have had varying attitudes to the importance of consensus on the MPC. Mervyn King took the view that as each member is individually accountable he too should vote as he saw fit, at times ending up on the losing side. Mark Carney, in contrast, never voted in the minority and largely presided over substantial majority decisions.

Market pricing shifted from implying a 60% probability of a cut prior to Pill's speech to roughly 50% in its wake. It has since bounced around, falling to 35% following stronger-than-expected services price inflation and then rising back to 40%-plus following labour market statistics.