MNI STATE OF PLAY: Split BOE Seen Continuing Gradual Hikes

The Bank of England is set to hike Bank Rate by another 25 basis points to 1.25% after its June meeting this week, but a Monetary Policy Committee split three ways is unlikely to provide further guidance on future policy ahead of the quarterly forecast round and new framework for gilt sales due in August.

The BOE hiked 25 bps in May and stated that further tightening “may still be appropriate”, but while all nine MPC members voted for the increase, three called for 50 bps and two dissented against the loose guidance. Another quarter-point hike is set to be announced on Thursday, but this time, with elevated uncertainty contributing to a continuing divergence in members’ views, dissents are possible both in favour of a larger increase in rates and against any hike at all.

The MPC is treading a narrow policy path between the dangers of high inflation becoming embedded in price and wage setting, and falling real incomes and plummeting confidence, which could feed through to a significant inflation undershoot further down the line. Members have split three ways, with some backing faster tightening, partly in the hope it may reduce the scale of rate hikes ultimately required, others favouring more gradual increases and those who are not sure that the BOE should be tightening at all.

The current guidance appears to be a compromise position reflecting the views of no one on the Committee at all. But agreeing on new language may be difficult, and Governor Andrew Bailey has made it clear that he is no fan of guidance in times of uncertainty anyway. (See MNI INSIGHT: BOE Rates Guidance Underplays Tightening Bias)

DATA DILEMMA

Economic indicators since May have only served to reinforce policymakers’ dilemma. The latest GDP data suggest that the MPC’s forecast at its last meeting of 0.1% quarterly Q2 growth may have been overly optimistic, while inflation is expected to keep overshooting the 2% target.

The National Institute of Economic and Social Research now projects a 0.4% quarterly fall in output following the 0.3% month-on-month drop in April seen in this Monday’s data. The household inflation expectations survey commissioned by the Bank, carried out in early May, found that year-ahead inflation was expected to be 4.6% and 3.4% two years ahead.

Recent public comments by MPC members’ have highlighted their differences.

Chief Economist Huw Pill on May 20 made the case for gradualism, but said “we still have some way to go in our monetary policy tightening,” while in a May 9 speech his colleague Michael Saunders, who had backed a 50-bps hike, advocated a rapid removal of accommodative policy. Bank rate should rise quickly to a neutral level, he said, though he acknowledged that this could lie anywhere between 1.25 and 2.50%.

If the June vote were set to split three ways, Bailey would propose the option most likely to get majority support, which would probably be 25 bps. This would avoid an “accidental” decision to hike by, say, 50 bps if four members were inclined that way, with three favouring 25 bps and two for no change.

With the Bank committed to publishing a framework for active gilt sales in August, the debate over balance sheet shrinkage looks set to be sidelined at June’s meeting. There will be no press conference following the decision.