MNI STATE OF PLAY: BOE Set For Open-Ended QT, 50bp Hike Split

The Bank of England’s Monetary Policy Committee is likely to split over whether to announce a 25- or 50-basis-point hike on Thursday, as members weigh not only high inflation but also what they might declare to be a likely imminent recession.

Only two more votes would be needed to tip the scales towards the BOE’s first 50-point increase of the cycle, after Jonathan Haskel, Catherine Mann and Michael Saunders backed 50 in June. Gov. Andrew Bailey, one of six who voted for 25 basis points at the last meeting, has now confirmed the larger increase will be on the table, even if it is "not locked in." (See MNI INSIGHT: Shrunk, Sick Workforce Adds To BOE Pressure) Chief Economist Huw Pill, another of those who opted for 25 in June, has also sounded more hawkish, pointing to the danger of second-round effects driven by energy price rises.

But the rising likelihood of a recession could reinforce fears that labour market tightness could soon ease and consumption decline amongst more dovish members of the MPC, which has been split over the pace of tightening since November.

The May Monetary Policy Report showed inflation at 1.5% by 2024 and 1.3% a year later, well below the 2.0% target, based on market rate assumptions, as energy’s direct contribution to price rises slides to near-zero, demand softens and the output gap widens. A similar forecast in August, with a higher near-term inflation peak of 11% or 12% but an undershoot further out, could be seized upon by doves to argue against following market expectations for more rapid tightening.

GILT SALES FRAMEWORK

The MPC will have to state in its August forecast round whether it thinks a recession is imminent. In May it had not foreseen two successive quarters of quarterly contraction, but, with the International Monetary Fund predicting UK growth of just 0.5% in 2023, the margin for forecast error separating expansion from a fall in output is slim.

The Bank is also set to announce its framework for active gilt sales. While Bailey has referred to a pace, including redemptions, of GBP50-100 billion in the first year, with the clock set to start when sales begin, their end point looks likely to be left open, given the difficulty of determining how far the balance sheet can be shrunk before it falls below demand for central bank reserves.

The sales programme itself, as Bailey said in his Jul. 19 Mansion House speech, could start "as early as at our September meeting," rather than this month, with the MPC set to vote on it next month rather than this.