MNI STATE OF PLAY: BOE Growth Upgrade, Tightening Nudge Likely

--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.

     --NO POLICY MEGAPHONE

     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.

     --INFLATION TARGET FOCUS

     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.

     -GROWTH, EARNINGS HIGHER

     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

consensus."

     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: david.robinson@marketnews.com

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