LONDON (MNI), May 18 – Bank of England Monetary Policy Committee
member Andrew Sentance’s final monthly meeting on the MPC ended like the
previous three, with him voting for a 50-basis-point hike, two
colleagues backing a 25 bps increase and the rest opting for no change.
For Sentance, who peppers his speeches with reference to rock
music, it was a case of ‘The Split Remains The Same’. If the key no
change camp on the MPC is edging towards a hike, the pace appears
glacial.
A trawl through analysts’ notes after the publication Wednesday of
the minutes suggests there was something in them for everyone.
Those analysts predicting an August hike reaffirmed their calls, as
did those forecasting the first move would come in November or even in
2012.
The BOE’s detailed May Inflation Report projections, also out
Wednesday, are clearly not compatible with leaving Bank Rate on hold
for much longer, but the minutes showed MPC members took differing
messages away from the Report.
The May Report’s Numerical Parameters set out the usual raft of
inflation and growth projections. The modal, implied market rates
forecast showed headline CPI rising from 4.5% in Q2 this year and
peaking at 4.96% in Q3 before declining to 1.9% two years ahead and then
sticking at that level through to Q2 2014.
The forecasts had a marked upside skew – with the mean projections
showing CPI peaking at 5.0% and staying just above the 2.0% target, at
2.06%, from Q2 2013 through to Q2 2014.
Those projections are based on Bank Rate rising from its current
0.5% to 0.7% in Q3 and 0.8% in Q4 this year, and then rising at near 25
bps a quarter in 2012.
For Sentance, and fellow MPC members Spencer Dale and Martin Weale,
the May Inflation Report supported their case for a hike now.
“For three members, the argument for removing some of the monetary
stimulus at this meeting remained strong, and the projections in the May
Inflation Report had reinforced that judgement,” the minutes said.
For the no change camp, however, “In time, some withdrawal of
stimulus would become necessary. But the May Inflation Report
projections implied that this did not need to occur immediately.”
The no change camp also highlighted the risk of a Bank Rate hike
hitting consumer confidence and spending.
They said “were the downside risks to consumer spending to
materialise, a path for policy weaker than that implied by market
prices (in the Inflation Report) might become appropriate.”
The Inflation Report has to be signed off by the entire MPC, and
once again its forecasts, in part reflecting disparate views on the
committee, have served to put the policy debate in sharper focus
without resolving it.
The June minutes could even show the MPC apparently moving further
away from a rate hike.
With Sentance leaving, his place goes to former Goldman Sachs
economist Ben Broadbent, and there is no guarantee he will vote for a
25 bps hike, let alone a 50bps one.
At his confirmation hearing in front of the Treasury Select
Committee, he stonewalled – avoiding any labeling as hawk or dove.
Asked which way he would have voted he said “I’m not willing to say
exactly what I would have done as I genuinely do not know … I’ve not
followed every number so I really don’t know”.
He acknowledged the strength of arguments for and against hiking
and said he could see no benefit in pre-committing.
“You only have to look at the split of the vote across the
committee over several months, more than a year to see that there are
strong arguments on both sides,” Broadbent said.
“I really don’t see any upside to my precommitting to a point of
view even before I join the committee, that would be wrong,” he added.
Broadbent said he also agreed with the broad thrust of MPC policy
decisions to date and with the broad projections of the May Inflation
Report, suggesting he could well side with the majority in the months
ahead.
With the data flow in coming weeks set to be distorted by the extra
bank holiday in April for the Royal Wedding. National Statistics does
not workday adjust its numbers, so the effect will not be stripped out
in the headline figures.
In addition, the extreme volatility in recent numbers, most notably
construction, could create greater volatility ahead.
The data flow is unlikely, therefore, to resolve the policy debate
one way or the other – a point made by the hawks who see that as a
clear point against adopting a “wait-and-see” policy.
“Given the volatility in output expected in the second and third
quarters, it was unlikely that the uncertainty over the strength of the
recovery would be resolves soon, so there was little benefit from
waiting before tightening,” the hawks argued.
The no change camp, however, are reluctant to tighten at a time
when consumers’ spending power is already under pressure and confidence
has fallen, and they warn the impact of a hike could be exaggerated on
spending.
With the data flow in the months ahead unlikely to provide much
reassurance on growth and consumption for the majority on the committee
a rate hike in Q3 is far from assured.
–London Bureau; Tel: +44207 862 7491; email: drobinson@marketnews.com
[TOPICS: M$$BE$]