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Repeats Story Initially Transmitted at 14:17 GMT May 10/10:17 EST May 10
--BOE MPC Vote 7-2 For Unchanged Policy; McCafferty, Saunders Backed Hike
By David Robinson
     LONDON (MNI) - The core of the Bank of England Monetary Policy Committee
(MPC), the five insiders along with two externals, all voted against tightening
policy at the May meeting, leaving Ian McCafferty and Michael Saunders isolated
in backing a hike.
     Bank Governor Mark Carney was keen, however, to drive home the message that
further tightening is likely only to be postponed, not cancelled. The Bank's
Inflation Report (IR) projections were compatible with the first hike coming as
early as August but a lower inflation profile left the MPC with scope for
further delay.
     The caution of the insiders over tightening policy is a well established
trend with not one of the current insiders having ever dissented, that is voted
against the majority in favour of tighter policy, and the May meeting
reconfirmed it. Hawkish dissent is for outsiders.
     The Bank cut its growth forecast compared to the February forecast round.
It also lowered its inflation projection; not because of the soft growth in Q1,
but because it reassessed the pass through from sterling's post Brexit vote
depreciation to consumer prices.
     "We are not going to get as much pass through to import prices as we
previously thought," Carney said.
     The MPC had assumed that 60% of the sterling denominated world export
prices would feed through to domestic inflation, but it lowered that view to
around 50%.
     The Office for Budget Responsibility, which produces the UK fiscal
forecasts, made a similar assumption about the less prolonged, less pronounced
impact of sterling depreciation on prices. It forecast that headline CPI would
dip below the MPC's 2.0% target towards the end of this year before recovering
but the Bank's May IR projections were smoother, with CPI hitting 2.0% in Q3
2020 and staying at target.
     The May IR showed that on a market rate path that had Bank Rate rising from
0.5% to 0.7% by Q3 this year and on up to 1.2% by Q3 2020 inflation was set to
come in bang-in-line with target.
     The role of the IR as a mix of communications device and forecast package
has, in the past, led to criticisms that its central inflation projections
appear to be tweaked and smoothed to deliver a message.
     "Our core message is that we think there needs to be an ongoing withdrawal
of monetary stimulus provided the economy turns out as we project. It's at a
gentle pace, they're limited and gradual moves," Carney said.
     The May IR inflation forecasts were again remarkably smooth and the simple
message it sent was that market rate expectations for a 25 basis point hike this
year and three hikes in all over three years were perfectly compatible with the
MPC's policy goal.
     Despite not delivering on a May hike that at one time markets had almost
fully priced-in, the message from Carney and his colleagues was that there was
no need for market participants to take out all their rate hike expectations.
     "What we said in February was that relative to the November forecast you
needed more sooner and more," he said
     "It happened to be more or less consistent with where the market curve had
been moving...towards three rate increases... In effect, it's broadly the same
curve as we were talking about in February," he added.
--MNI London Bureau; tel: +44 203-586-2225; email:
--MNI London Bureau; tel: +44 203-586-2223; email:
MNI London Bureau | +44 203-865-3812 |