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--Carney Highly Unlikely To Go For Stark Warning On Near Term Hike
--BOE Forecasts To Support Tightening Case; Earnings Pick-Up Expected  
By David Robinson
     LONDON (MNI) - The Bank of England Monetary Policy Committee is likely to
produce a more upbeat set of economic forecasts without issuing any stark
warning about a near-term rate hike following the February meeting.
     The MPC has conducted its annual supply stock take and the committee could
announce that it thinks there is little, if any, spare capacity left. This,
coupled with Inflation Report projections of higher growth, rising earnings and
above target inflation, should be enough to point to further tightening without
any explicit policy warnings.
     The MPC used megaphone diplomacy to get markets to place a lot of weight on
its November rate hike, announcing in September in its Monetary Policy Summary
that "some withdrawal of monetary stimulus is likely to be appropriate over the
coming months."
     That September policy message was atypically blunt, but markets had not by
then reacted to the latest Bank forecasts showing a prolonged inflation
overshoot or to the MPC's August warning that policy may need to "be tightened
by a somewhat greater extent" than implied by the yield curve.
     The MPC has usually eschewed using trigger words and phrases to signal
upcoming policy shifts. The raft of material to be published next Thursday will
provide ample opportunity to set out the MPC's thinking without crude messaging.
     Speaking in London in January, MPC member Michael Saunders said that if the
economy evolved broadly as he expected with "labour market tightness and signs
of higher pay growth - I consider it likely that interest rates will need to
rise further over time."
     Saunders' speech, despite its studied vagueness over timing, was enough for
some analysts to speculate that he could back a hike as early as February and
very probably by May. 
     If the centre of gravity on the MPC is seen to be moving in Saunders'
direction, the weight attached to a May hike could rise without any time
specific guidance.
     Money markets have already, based on SONIA, been placing around a 50%
chance on a May hike.
     Back In 2013 the MPC's policy framework was amended to explicitly
acknowledge that if the Bank found itself in "exceptional circumstances" it
could take longer to bring inflation back to target.
     Since the June 2016 referendum result the MPC has been operating on the
assumption it is working in exceptional times, but it has been increasingly hard
to justify this view as the economy develops.
     One implication of that is that if February's Report forecasts show a
prolonged overshoot of the 2% target over the three year forecast horizon, the
MPC now sees its mandate dictating it should set policy to get it back to target
within that time frame.
     The November inflation projections showed CPI only drifting down from 2.97%
in Q4 this year to 2.15% in Q4 2020 and February's projections are unlikely to
be very dissimilar. Governor Mark Carney's comments this week to the Lord's
Economic Affairs Committee make clear that the committee is running out of
excuses for tolerating such an overshoot.
     One of the more controversial assumptions underpinning the Bank's November
projections was that earnings growth would accelerate.
     Average weekly earning were assumed to rise from four quarter growth of
2.25% in Q4 this year to 3.0% in Q4 2018 and 3.25% in Q4 2019. Carney suggested
in his evidence to the Lords that those projections were fine, with a tighter
labour market set to feed through to higher earnings.
     The MPC is divided over the likely path of earnings. Deputy Governor Ben
Broadbent appears to be in the same camp as Carney, while Saunders said he
thought pay growth was "more likely to overshoot than undershoot the external
     The MPC is also more likely to raise than lower its 2018 and 2019 growth
forecasts. Carney said they expected business investment to pick-up next year as
Brexit uncertainty abated.
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,MX$$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 |