MNI STATE OF PLAY: BOE MPC Split On Outlook, Policy On Hold

The Bank of England's Monetary Policy Committee members are starting to diverge in opinions over the balance of risks to the economic recovery, the minutes of the March meeting show, despite policymakers voting unanimously to keep interest rates on hold at 0.1% and combined QE levels unchanged at GBP895 billion.

There was no consensus on the MPC around the most likely path of the UK recovery, with deep uncertainty over how fast the supply and demand sides of the economy would recover as Covid related restrictions were lifted, with the minutes noting a "range of views across" on the degree of spare capacity in the economy currently (and) whether the recovery would see demand outstrip supply.

The rise in yields in recent weeks was attributed at least in part to the improved economic outlook and news on the U.S. fiscal stimulus and a full evaluation of its impact will be carried out in the May forecast round but there was no indication that the MPC was thinking about accelerating asset purchases to offset it.

"The Committee continued to envisage that the pace of purchases could remain at around its current level initially, with flexibility to slow the pace of purchases later," the minutes said.

FISCAL STIMULUS

The March meeting was the MPC's first chance to debate the impact of the UK and U.S. budgets. The UK one, which extended the furlough scheme, was expected to lead to a lower unemployment peak that seen by Bank economists, while U.S. stimulus of USD1.9 trillion was almost double what the MPC had envisaged and was expected to push up global demand.

In February, the MPC projected unemployment at 7.79% in Q3 this year, but that looks set to be revised lower in the May forecast as the minutes stated the extension announced in the Budget of the government employment support scheme "was likely to mean that the near-term rise in the … unemployment rate would be more moderate."

The unemployment rate was only a partial indicator of earnings pressures, the MPC noted, and increased flows into economic inactivity could well be reversed as the recovery strengthened and furloughed workers, set to return to work, could put downward pressure on earnings growth.

FORECASTS

The MPC's growth forecasts also look set to be pushed higher as developments in global GDP growth have been "a little stronger than anticipated" and the substantial US fiscal stimulus should provide significant additional support to the outlook, the minutes said.

BOE chief economist Andy Haldane has recently sounded the most bullish on the recovery while independent MPC members, including Gertjan Vlieghe and Jonathan Haskel, have highlighted downside risks and left the door wide open to backing further stimulus.

MPC members were divided whether households would run down a large share of their involuntary savings built up during the Covid lockdowns or if they would remain cautious in their consumption and investment decisions.

Differences among members are unlikely to be resolved in the immediate future and the minutes stressed how exceptionally uncertain the outlook was, with initially upbeat news on a swift rollout of UK vaccines set against concerns over delays in vaccination programmes globally and the risks of new resilient Covid variants emerging.