MNI PREVIEW: BOE Debates 25bps Cut, Insiders' Views Unclear

--MPC Members' Differences Not Large; Debate About Cutting 25bps Or Leaving On

Hold

--BOE's Annual Supply Side Review Could Find More Spare Capacity But Potential

Growth Lower

--Markets Have Taken BOE "Finely Balanced" Message On Board

By David Robinson

     LONDON (MNI) - The Bank of England Monetary Policy Committee is engaged in

a finely balanced debate over a possible 25-basis-point rate cut, with market

pricing suggesting the odds on easing are evenly balanced ahead of Thursday's

announcement of the outcome of its January meeting.

     The following are key pointers to the meeting:

     --The outcome cannot be predicted with any confidence from recent MPC

commentary. Out of nine MPC members, four of the five internals have not

provided any recent analysis and Governor Mark Carney's January speech was even

handed, summarising cases for both easing and holding fire.

     Communication has been disrupted by a prolonged blackout, with the enforced

period of silence due to the Dec. 12 general election kicking in before MPC

members could speak publicly following their November meeting.

     Between late December and the start of this month's pre-meeting quiet

period, all four externals spoke. Jonathan Haskel and Michael Saunders

explicitly supported a cut, while Silvana Tenreyro and Gertjan Vlieghe said they

were considering voting for one. Carney's speech was the only public comment by

an internal during the period.

     As MNI has highlighted insiders Chief Economist Andy Haldane and Deputy

Governor Jon Cunliffe have previously voted for policy changes without trailing

their intentions in the run up to the decision while their colleague Deputy

Governor Ben Broadbent declines to "spoon feed" markets.

     --The least surprising outcome might be a six-to-three vote for no change,

but all outturns from seven-to-two for no change to nine-to-zero for a cut are

plausible, and have their backers among analysts.

     --The spread of views on the MPC appears to be narrow, with no inflexible

hawk and dove camps and debate restricted to whether or not to cut 25 basis

points with precious little chance of any outliers opting for a larger cut or

tilting to tightening.

     Typically, if MPC members do vote for a change in Bank Rate there is

consensus with regards to the size of the move. Exceptions, such as during the

aftermath of the global financial crisis in January 2009, when eight members

voted for a 50-basis-point cut and David Blanchflower dissented to back a

reduction of 100 bps, have been rare.

     --MPC members have stressed the need to look at post-election data to get a

steer on whether a rebound is likely after a flat fourth quarter, with Vlieghe

arguing that a clear improvement in the economy was necessary to avoid a cut

while Tenreyro emphasised reacting if downside risks materialised.

     Post-electoral data has been mixed. The CBI's manufacturing and retail

surveys highlighted softness in investment intentions and demand, while

January's flash PMI shot up to 52.4 from 49.3. Some argue however that these

surveys may measure business confidence more accurately than they anticipate

future activity levels.

     --Results of the BOE's annual supply side stock take, assessing levels of

spare capacity and the potential for growth in supply growth, will also be

revealed on Thursday.

     There is a reasonable chance that the MPC's assessments of these two

variables might offset each other. Following recent sluggish or non-existent

growth, spare capacity may be judged to have increased from the previous

estimate of 0.25% of GDP while potential growth may have dipped, meaning that

even a modest recovery could add to inflationary pressure.

     Saunders said in his Jan. 15 speech that as recent growth has fallen below

the Bank's estimate of potential "the output gap now may be a little bigger,

perhaps 0.33% to 0.5% or so of GDP."

     But potential supply growth could be anaemic, as Carney pointed out.

     "The weakness in investment has weighed on growth in the potential supply

capacity of the UK economy, through lower growth in the capital stock and

reduced process innovation," Carney said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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