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Bullish Price Sequence

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The Bank of England, faced with a lingering Covid pandemic and with its monetary policy committee split down the middle over whether a key hurdle for tightening has been met, looks set to leave policy untouched at its September meeting which concludes with an announcement Thursday.

With all bar one MPC member voting in August to carry on with the current GBP150 billion asset purchase round, which will take until December to complete, there seems little prospect of a majority voting to halt it this month and running the risk that the market could interpret that as tightening. Instead the Committee will judge that its continuation provides some insurance against higher market interest rates. Bank Rate too will almost inevitably be left at 0.1%.

The MPC's agreed strategy is that it will not tighten at least until there is clear evidence of significant progress in eliminating spare capacity, a form of words which is loose enough to provide plenty of room for disagreement over whether the higher inflation that has materialised will be sustainable and whether the output gap will reopen as supply rebounds.

The MPC split four-four at its August meeting over whether this condition had been met. Governor Andrew Bailey and Deputy Governors Ben Broadbent and Dave Ramsden acknowledged at a subsequent Treasury Select Committee hearing on Sept. 8 that they were among those who thought it had been met, while independent member Michael Saunders, who was alone in voting to end asset purchases, is the prime suspect as the fourth man.


The September meeting will mark the first MPC appearance of Catherine Mann, the former top Citi and previously chief OECD economist whose three-year term started Sep 1. Before her appointment Mann had forcefully expressed the view that the rise in inflation in advanced economies is likely to prove temporary as supply returns when the Covid shock fades, so her presence could tilt the scales to five-four against the tightening criteria being met.

One wrinkle, though, is that Mann is probably no great fan of the MPC's agreed guidance, having described herself as a campaigner against interpreting output gaps as harbingers of future inflation pressures. Relying on the output gap tends to make policy tighten too soon, she said in written evidence to the Treasury Select Committee.

With the next full economic forecast round not taking place until November, the September meeting is likely to see plenty of references to holding off on comprehensive judgements of recent developments for another couple of months.

Since August, the government has announced a total 2.5-percentage-point rise in National Insurance Contributions, a labour income tax, split between employers and employees. Broadbent has pointed out that as the tax rise funds spending on health and social care its overall economic effects are not likely to be significant but again the MPC will probably defer comprehensive commentary to November.

The spike in energy prices, driven by economic reopening and a series of supply hits, is something else that the MPC may feel will become clearer with the passage of time. The view of MPC members, including Bailey and Ramsden, has been that rather than energy prices, the bigger risk of a sustained inflation rise comes from labour market shortages.