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-No Guidance On Timing Of Next Hike; Postpones Commentary On QE Unwind
By David Robinson
LONDON (MNI) - The Bank of England Monetary Policy Committee duly delivered
its 25 basis point hike in November and made clear further tightening was very
likely to be needed but it offered no guidance on the timing of the next
increase and it steered clear of discussing quantitative easing unwinding.
The absence of any guidance over another near-term hike and the MPC's
ditching of its line that markets may be under-estimating overall tightening put
the package at the dovish end of market expectations. The committee's approach,
however, is very much about sequencing -- get the first hike out of the way and
assess reactions to it before addressing the timing of the next hike, or hikes,
before tackling QE unwind.
In the November Inflation Report, the Bank published detailed work on the
sensitivity of businesses and households to an interest rate change. The
conclusion was that both were largely well-placed to withstand a hike and
November's 25bps increase will allow the Bank to check if things play out as it
The recent public comments by BOE Governor Mark Carney and his deputy Ben
Broadbent have sent the message to business and consumers that the November
increase is unlikely to be a one-off but they did not shake-up market pricing,
which was already factoring-in a couple more hikes.
Carney's message, however, was not all that dovish as he made clear that
two hikes were likely to be required as a minimum.
"Our forecast is conditioned on a market curve which has two additional
rate increases over the forecast horizon, and we ... need those two additional
rate increases in order to get that return of inflation to target," Carney said
at the Inflation Report press conference.
"In fact, if you look closely at the forecast, inflation approaches the
target, (but) it doesn't quite get there and the economy is likely to be in a
position of excess demand, in other words, running a little hot at that point,"
On market rate expectations for a couple of hikes, the headline inflation
measure, CPI, was projected to be at 2.15% in three years' time, still over the
2.0% target, albeit modestly.
The MPC's constant rate forecast, with Bank Rate held at its post November
hike 0.5% level, showed CPI only drifting down from 2.98% in the fourth quarter
of this year to 2.39% in three years' time.
The MPC had allowed CPI to run above target in a trade-off to support
employment and growth, but as Carney pointed out "our normal horizon to return
inflation to target is 18 to 24 months."
The long, and variable, policy lags suggest further tightening should not
be that long delayed if the committee is serious about getting CPI sustainably
back to 2.0% rather than leaving it lingering above it.
"Once that trade-off goes away ... and it's almost gone, the justification
for an inflation targeting central bank to continue to overshoot, to continue to
miss its target, three years out, disappears," Carney said.
-BREXIT REMAINS A WILD CARD
The key to the MPC majority's approach is that its members believes that
there is little spare capacity left in the UK economy and that supply growth is
likely to remain sluggish, so continued GDP growth rates of just 0.4% to 0.5%
quarter-on-quarter, or around 1.5% a year, are likely be enough to fuel
The two dissenters who backed no rate increase, deputy governors Jon
Cunliffe and David Ramsden, are unconvinced earnings growth will accelerate,
making them doubtful about the emergence of sustained inflationary pressure.
One factor depressing UK supply growth in the MPC's judgement has been the
uncertainty around Brexit. Despite world economic growth rebounding, business
investment growth in the UK has been subdued, suggesting local factors are
"Since the referendum, what we have seen is that business investment has
picked up, but it hasn't picked up to the extent one would have expected given
how strong the world is, how easy financial conditions are, how high
profitability is and how little capacity they have ... It should really be
booming, and it's just growing," Carney told ITV's Peston programme on Sunday.
As perceptions of the likelihood of a Brexit transition deal and the shape
of the final deal with the EU evolve, businesses could go ahead with previously
deferred investment or cancel it altogether.
"A little more progress, or a little less progress, will matter for the
economy to the extent to which people change their attitudes, and change their
spending plans, both positively and negative, on supply and on demand," Carney
Resolution of some of the big questions around Brexit could have a sizeable
effect on the economic outlook but while the impact may be the large the
question of whether clarifying the Brexit outlook will push up or down on supply
and demand growth remains open.
"I would caution ... that the consequences of resolution on Brexit are not
... automatic for the path of inflation. It doesn't necessarily go in one
direction," Carney said.
The MPC is basing its forecasts on a smooth Brexit transition, with the end
state a somewhat less open UK economy than before the referendum vote. Those are
stylised assumptions and a disorderly Brexit with, say, the UK ending up with no
deal and unprepared to handle the new trading regime, lies outside the forecast.
Not only is the directional impact of Brexit on inflation uncertain, it
could still end up being something not even factored into the current forecast
-QE UNWIND: WE DON'T WANT TO TALK ABOUT IT
With the MPC hiking Bank Rate for the first time in a decade, the question
of how unwinding quantitative easing will fit into the tightening process was
bound to come into focus.
The MPC's current guidance, set out in the November 2015 Inflation Report,
is that QE unwind, whether through non-investment of the proceeds of maturing
gilts or active sales, will only begin when Bank Rate is raised to a level from
which it can be materially cut.
The MPC reckoned back then that level was around 2%, some 75 basis points
above the level sterling overnight rates suggest Bank Rate will reach five years
The MPC could stick to its approach of initially using Bank Rate as the
active tightening but at least get QE unwind on the map by lowering that 2%
Carney, in recent evidence to the Treasury Select Committee, sketched out a
case for dropping it to around 1.5% -- on the grounds that average UK tightening
cycles have been about 150 basis points.
At the Inflation Report press conference, however, he was keen to avoid
muddying the waters by saying anything of note on QE unwind at all.
Asked if there had been any discussion about reinvesting gilt proceeds and
the 2% threshold, with the Fed starting quantitative tightening at 1.25%, Carney
stone-walled, while avoiding referring to the 2% level.
"Well I, for the purposes of today, I just leave ... the guidance that the
MPC gave a few years ago," Carney said.
He said that the MPC would like to go through a conventional rate cycle,
which would result in "Bank Rate being notably higher than where it is today,"
without specifying what that level would be.
"We've just taken a decision today. I don't want to inadvertently send a
signal about something that would be much further down the track," he added.
Nevertheless, while actual QE unwind could end up being much further down
the line the MPC could at any stage chose to update its guidance on it.
For now, sequencing is paramount for the committee. The first hike is done,
the reaction of economic actors will be analysed and the probable timing of the
next hike is likely, to use Carney's old phraseology, to come into sharper focus
around the turn of the year -- in the run up to the February Inflation Report.
--MNI London Bureau; tel: +44 203-586-2223; email: email@example.com
--MNI London Bureau; tel: +44 203-586-2225; email: firstname.lastname@example.org
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