MNI REVIEW: BOE Holds, But Pick-Up Needed To Avoid Cut

By David Robinson and Irene Prihoda

     LONDON (MNI) - There was no shift in the Bank of England Monetary Policy

Committee's seven-to-two vote split for unchanged policy at its January meeting,

but the BOE's governor said a cut could come unless the economy picks up in line

with surveys showing diminishing uncertainty and improved confidence following

the December General Election.

     Collective guidance from the Committee cited the possibility of both easing

and tightening ahead depending on how events unfold.

     Following are key points from the minutes, Monetary Policy Summary and the

final press conference led by outgoing Governor Mark Carney:

     Carney said that the hard data needed to "fill-in", or back up, the

improved survey data "or else some additional stimulus would .. likely be

required .. to reinforce the recoveries in GDP and inflation."

     -While further stimulus could be required near-term Carney also set out the

reasons why tightening could come down the line.

     The MPC's projections showed that in 2020 the Bank anticipates the UK

economy will have excess supply of 0.5% of GDP but will then see excess demand,

of 0.25% of GDP in 2021 and 0.5% of GDP in 2022.

     Carney noted the projected shift into excess demand and said that at that

point tightening could be required.

     -The MPC dropped the line that "limited and gradual" tightening may be

needed from its collective statement and instead replaced it with the

formulation that "some modest tightening of policy may be needed."

     --MODEST TIGHTENING

     Carney indicated that the MPC had seen limited and gradual tightening as

indicating a short series of hikes, whereas the new wording leaves it open as to

whether one or several hikes will be needed.

     -The MPC's collective statement, as it had no dissenting views attached,

will reflect the spread of views on the MPC.

     It is unsurprising, with two members voting for a cut, and others appearing

closer than others to endorising one, that it ended up leaving the options of

easing and tightening open.

     -The starkest feature of the Bank's quarterly economic analysis was how

badly it believes potential supply growth has deteriorated.

     BOE Deputy Governor Ben Broadbent said the MPC used to assume potential

supply growth was around 2% but this was cut to an average of 1.1% over the next

three years in the Bank's January supply side stocktake.

     Broadbent said that around a half of the 1-percentage-point fall was due to

diminution of labour supply growth and half to weaker productivity growth.

     He said that some of this deterioration was due to the cconsequences of the

UK's decision to leave the European Union, without specifying how much.

     -The quarterly economic projections pointed to a finely balanced policy

debate ahead.

     Based on the market assumption that Bank Rate is cut from its current 0.75%

to 0.5%, inflation was shown falling to 1.53% a year ahead before rising just

above target to 2.01% in the first quarter of 2022 and 2.15% in the first

quarter of 2023.

     On the other hand, on the condition that Bank Rate was left on hold at

0.75%, inflation was shown at just 1.44% in the first quarter of 2021 before

gradually rising to 1.99% three years ahead.

     This was the first forecast showing a three year undershoot of the target

on constant rates since May 2009.

     Carney said the overshoot, on market rates, was not compatible with the

Bank's target. The three year undershoot on constant rates, however, highlights

the fine balance of the policy debate.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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