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(Z1) Downside Pressure Resumes

MNI (London)
--Softer UK Survey Data In Recent Months Unlikely To Derail MPC Action
By David Robinson
     LONDON (MNI) - The Bank of England Monetary Policy Committee is unlikely
this week to disturb expectations that the next hike could well come in May,
despite some softer data in recent weeks.
     With no gathering in April, the March MPC meeting is a bridge between
February, when the committee warned of an earlier hike, and May -- when the
policy decision can be justified by that month's quarterly Inflation Report
     There have been data surprises since the February IR, with productivity
growth far stronger and some activity indicators weaker than expected. But these
are unlikely to be enough to get the committee to back down from its February
     The MPC stated in February that if things evolved broadly as expected
policy "would need to be tightened somewhat earlier and by a somewhat greater
degree over the forecast period than anticipated at the time of the November
(Inflation) Report."
     Money markets see a May hike as substantially more likely than not, with
SONIA putting an 80% probability on a 25 basis point rate increase, lifting Bank
Rate to 0.75%.
     Productivity growth in both Q3 and Q4 would suggest the data is set to
outstrip MPC expectations. The MPC, however, is likely to follow the Office for
Budget Responsibility in arguing that the sharp gains are likely illusory,
largely due to a fall in hours worked.
     In February, BOE Deputy Governor Ben Broadbent expressed scepticism over
strong Q3 productivity growth, saying that the fall in labour market
participation and employment in Q3 "looked a bit spurious..."
     The renewed fall in hours worked in the fourth quarter will be viewed as
similarly spurious by Broadbent and his colleagues.
     His predecessor, Charles Bean, last week told MNI that the fall in hours
worked was most likely due to measurement error: "output growth and employment
growth have been in line with expectations ... that makes you think that it is
the hours data that is out of line."
     The MPC will to wait for a couple more quarters data to be confident that
the productivity rise was spurious, and through to the May meeting it will not
place much weight on the idea that inflation pressures are easing because of
improving productivity.
     A weakness in output growth, showing up in some forecasts, is also unlikely
to be taken at face value, with the impact of a cold snap likely to distort the
Q1 output numbers.
     Stronger sterling and higher interest rate curves following the MPC's
February guidance should help weigh on the inflation profile, bringing it down
to around the 2.0% target. Indeed, the OBR had CPI dipping a little below 2%
next year.
     There is, however, a circularity here as the downward pressure from higher
yield curves would be unwound if the committee MPC steered expectations away
from a May hike this week. Instead, the most likely outcome is that the March
minutes and policy decision, due Thursday, will leave rate expectations
     One moot point is whether one or two MPC members will actually vote for a
March hike rather than waiting till May. With some signs of softness in the data
and a May hike largely priced-in, they will be under little pressure to do so if
the MPC as a whole reaffirms a line pointing to near term tightening.
     Historically, rate changes have been a lot more likely in Inflation Report
months, as it gives the MPC the chance for justification with an updated set of
economic forecasts. The March meeting is likely to be a footnote to the May one.
--MNI London Bureau; tel: +44 203-586-2225; email:
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MNI London Bureau | +44 203-865-3812 |