MNI STATE OF PLAY: BOE MPC Unite In Earlier Rate Hike Warning

By David Robinson and Jamie Satchithanantham

     LONDON (MNI) - Bank of England Monetary Policy Committee (MPC) members were

united Thursday in warning that interest rates may have to rise earlier and

further than had been expected if the economy evolves as projected.

     The MPC has decided collectively to stop setting policy on the assumption

that these are exceptional times and made clear in its February policy statement

that it will no longer take more time than usual to get inflation back to the 2%

target.

     The almost inevitable future divisions among the MPC will be over

interpreting the data and the likely economic outlook and not over tactics. A

rate hike in coming months, most probably May, will only be avoided if the data

disappoint.

     The MPC's mandate acknowledges that in "exceptional circumstances ... the

Committee is likely to be faced with more significant trade -offs between the

speed with which it aims to bring inflation back to target."

     --OLD NORMAL

     Since the June 2016 vote to leave the European Union, the MPC has been

operating on the assumption that circumstances have been exceptional and that it

can take its time taking elevated inflation, caused in large part by sterling

weakness, back to target.

     Thursday's policy statement was tantamount to stating that the exceptional

times were over. The MPC judges that there is "very limited" slack left, it sees

unemployment holding just below the equilibrium rate and while growth is

forecast to be soft by historic standards it will still be above the MPC's 1.5%

estimate of potential growth.

     So the MPC is returning to its traditional approach of setting policy to

hit the target in line with how long it takes for an interest rate move to be

passed through in full -- 18 to 24 months.

     On the conditioning assumption that Bank Rate will rise from its current

0.5% to 0.6% in Q3 this year and 0.7% in Q4, inflation was shown only drifting

down from 2.92% in the first quarter of this year to 2.16% two years ahead.

     To get CPI to around 2.0% in two years the MPC will have to do more than

that.

     Carney said in the question and answer session that it was wrong to say

tightening would be more rapid but it would come earlier and there would be

more.

     --'SOMEWHAT SOONER'

     "It will likely be necessary to raise interest rates to a limited degree in

a gradual process but somewhat earlier and to a somewhat greater extent than we

had thought in November....So the message is not 'more rapidly'...it is

'somewhat sooner' and to a 'somewhat greater extent'," he said.

     In other words, while the pace of tightening may still be gradual,

increases will start earlier.

     That puts a May hike in the frame. Nevertheless, cracks are still likely to

appear on the committee.

     --SPLIT VOTES

     On January 15, giving her maiden speech as an MPC member, Silvana Tenreyro

set out her reasons for being relatively bullish on productivity growth.

     If things evolved as the MPC had forecast back in November "I expect

perhaps a couple more increases in Bank Rate will be required over the next

three years," she said.

     That contrasted with the more hawkish analysis of her colleague Michael

Saunders, who put the spotlight on rising pay pressures partly due to widespread

skill shortages and the weakness of potential growth - which he thought could be

below 1.5%.

     Despite the MPC's unanimity over tactics, its determination to get

inflation back to target over two years, members may soon be back to split

voting.

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

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