Preview: BOE MPC Tightening Strategy, Not Vote, In Spotlight

-Key Call For BOE MPC Is Whether To Signal Whether Near Term Hike Likely And

Flesh Out Tightening Strategy

By David Robinson

     LONDON (MNI) - The Bank of England Monetary Policy Committee's August

meeting is widely expected to result in either increased, or at least unchanged,

support in favour of unchanged policy with the spotlight instead on whether the

committee signals a near-term hike is likely and whether it fleshes out its

tightening strategy.

     Of the three MPC members who voted for a hike at the June meeting one,

Kristin Forbes, has left and analysts' median forecast is for a six-to-two vote

for unchanged policy this time around. More significant than the vote, however,

is likely to be whether the MPC adopts any wording pointing to a near-term rate

hike and whether it revisits its guidance that there will be no unwinding of

quantitative easing until Bank Rate is up at 2%.

     Bank Rate is currently at a mere 0.25% and does not reach 2% on market

curves within the MPC's three-year forecast horizon, so the committee is

offering no timeline for unwinding QE. The MPC has pledged to keep topping up

maturing gilts, keeping the stg435 billion stock of asset purchases constant,

entailing that there will be no gradual shrinkage of the Bank's balance sheet.

     MPC member Ian McCafferty in a Times interview published on July 13 said

that the BOE, like other central banks, such as the US Federal Reserve, should

be looking afresh at setting out plans to unwind its asset purchases.

     "Given that other central banks are thinking about it, I think it would be

remiss of us not to at least think about it," Mr McCafferty said.

     Near flat yield curves create distortions and if the MPC only debates when

to hike Bank Rate it risks limiting its impact to the short end of the curve,

     "It may well be that we need to think, 'Are there qualitative differences

in terms of the impact on the slope of the yield curve'?" McCafferty said.

     The National Institute of Economic and Social Research on Monday called on

the MPC to set out its plans to move towards policy normalisation but Amit Kara,

Head of UK Macroeconomics at NIESR, has his doubts over whether earlier QE

unwind would be the optimal strategy. 

     "By raising the policy rate, the MPC will influence the short end of the

yield curve much more than the long end and because households have a greater

exposure through mortgages to interest rates at the 0-3 year horizon, a hike in

the Bank Rate will be felt most by households," Kara told MNI.

     "If instead, the MPC decides to divest from its bond portfolio, the impact

will be greatest at the longer end of the curve and because the duration of

sterling corporate debt is longer, in the region of 8-9 years, it is the

corporate sector that will be squeezed," he added.

     Kara warned that hitting corporate profitability and, potentially,

investment spending carried risks "against the backdrop of dismal productivity

performance," so the MPC may opt to let the consumer take the policy hit.

     Nevertheless, the committee could discuss the issue at its August meeting

or, at least, BOE Governor Mark Carney could be forced to comment on the

strategy at Thursday's post Inflation Report press conference.

     MPC members in the past have discussed the merits and shortcomings of

committing to topping up the stock of QE, and it is another issue that needs to

be looked at.

     If the August minutes reveal no fresh debate over policy tightening and

conclude with the same anodyne guidance as the June minutes, that rate hikes are

expected to be limited and gradual and that policy will respond as the economic

outlook unfolds, then the meeting would be seen as doing little more than

treading water.

     One reason the MPC may wait before putting any more flesh on its approach

to policy normalisation is the impending arrival of Dave Ramsden, the chief

economic adviser to the Treasury and head of the Government Economic Service,

who takes over as the BOE's deputy governor of markets and banking on September

4.

     His brief includes QE unwind, and as a key player at the Treasury in the

development of QE in the first place, he is as well placed as anyone to assess

the risks around it. The MPC may want to wait for his input before revisiting

its approach.

     The BOE's August Inflation Report's forecasts, also out Thursday, are

likely to be of no great significance, with a weaker near term growth profile

but with similar projections for 2018 and 2019. The modal forecast in the May

Inflation Report was for growth of 1.9% in 2017, 1.7% in 2018 and 1.8% in 2019

with CPI inflation at 2.82% in Q4 this year and holding above the 2% target to

stand at 2.26% three years out.

     The MPC could well nudge its near-term growth forecasts down but if there

is little change to its 2018 and 2019 forecasts and the inflation profile is

little changed, it is hard to see how these forecasts will be decisive in the

policy debate in coming months.

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

--MNI London Bureau; +44 203-586-2226; email: jamie.satchithanantham@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]