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

--MPC Members' Differences Not Large; Debate About Cutting 25bps Or Leaving On
--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:
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]

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