MNI STATE OF PLAY: BOE MPC On Hold; Leaves Aug Hike On Table

--BOE MPC Vote 7-2 For Unchanged Policy; McCafferty, Saunders Backed Hike

By David Robinson

     LONDON (MNI) - The core of the Bank of England Monetary Policy Committee

(MPC), the five insiders along with two externals, all voted against tightening

policy at the May meeting, leaving Ian McCafferty and Michael Saunders isolated

in backing a hike.

     Bank Governor Mark Carney was keen, however, to drive home the message that

further tightening is likely only to be postponed, not cancelled. The Bank's

Inflation Report (IR) projections were compatible with the first hike coming as

early as August but a lower inflation profile left the MPC with scope for

further delay.

     The caution of the insiders over tightening policy is a well established

trend with not one of the current insiders having ever dissented, that is voted

against the majority in favour of tighter policy, and the May meeting

reconfirmed it. Hawkish dissent is for outsiders.

     --LOWER GROWTH FORECAST

     The Bank cut its growth forecast compared to the February forecast round.

It also lowered its inflation projection; not because of the soft growth in Q1,

but because it reassessed the pass through from sterling's post Brexit vote

depreciation to consumer prices.

     "We are not going to get as much pass through to import prices as we

previously thought," Carney said.

     The MPC had assumed that 60% of the sterling denominated world export

prices would feed through to domestic inflation, but it lowered that view to

around 50%.

     The Office for Budget Responsibility, which produces the UK fiscal

forecasts, made a similar assumption about the less prolonged, less pronounced

impact of sterling depreciation on prices. It forecast that headline CPI would

dip below the MPC's 2.0% target towards the end of this year before recovering

but the Bank's May IR projections were smoother, with CPI hitting 2.0% in Q3

2020 and staying at target.

     The May IR showed that on a market rate path that had Bank Rate rising from

0.5% to 0.7% by Q3 this year and on up to 1.2% by Q3 2020 inflation was set to

come in bang-in-line with target.

     The role of the IR as a mix of communications device and forecast package

has, in the past, led to criticisms that its central inflation projections

appear to be tweaked and smoothed to deliver a message.

     "Our core message is that we think there needs to be an ongoing withdrawal

of monetary stimulus provided the economy turns out as we project. It's at a

gentle pace, they're limited and gradual moves," Carney said.

     The May IR inflation forecasts were again remarkably smooth and the simple

message it sent was that market rate expectations for a 25 basis point hike this

year and three hikes in all over three years were perfectly compatible with the

MPC's policy goal.

     --CARNEY CLARIFICATION

     Despite not delivering on a May hike that at one time markets had almost

fully priced-in, the message from Carney and his colleagues was that there was

no need for market participants to take out all their rate hike expectations.

     "What we said in February was that relative to the November forecast you

needed more sooner and more," he said

     "It happened to be more or less consistent with where the market curve had

been moving...towards three rate increases... In effect, it's broadly the same

curve as we were talking about in February," he added.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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