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Free AccessREPEAT: BOE PREVIEW:MPC Tightening Strategy In Focus, Not Vote
--Key Call For BOE MPC Is Whether To Signal Whether Near Term Hike Likely
--Also, Whether/How To 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
consistant, 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 to 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.
According to McCafferty, "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'?"
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
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
[TOPICS: M$B$$$,M$E$$$,M$$BE$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.