–Some Analysts Bring Forward Rate Calls Post Inflation Report
–BOE King Presser, Various BOE Projections Leave Policy Debate Raging
LONDON (MNI) – The Bank of England’s February Inflation Report
and the press conference fronted by Bank of England Governor Mervyn
King delivered ambiguous policy messages but the Report’s key forecasts
do support gradual monetary tightening.
In the wake of the Inflation Report, the instant market reaction
was to call it “dovish” but analysts at two of the UK’s major banking
group brought their call for the first rate hike from November to May.
The debate over where policy is heading is still raging in the wake of
the report’s publication, but if the world evolves as it projects, Bank
Rate will be heading higher.
The report’s forecasts based on market interest rate expectations
showed inflation pretty much on track to meet the BOE Monetary Policy
Committee’s 2.0% target two and three years ahead, while it was expected
to remain well above target for much of the time before then.
Compared to November, despite a sharp move higher in market rate
expectations, the report shows the chances of inflation hitting target
two years are little changed.
The report’s market rate forecasts are conditioned on Bank Rate
rising from its current 0.5% level to 0.7% in Q2 and on up to 1.0% by
year end. Bank Rate then continues to rise to 2.1% by the end of 2012 –
reflecting a steady sequence of 25-basis-point hikes per quarter.
The Inflation Report’s projections show that on these Bank Rate
assumptions the inflation outlook is clearly higher than the MPC foresaw
back in the November Inflation Report, and two and three years ahead the
chances of CPI “being more than half a percentage point above or below
(the 2.0% target) are roughly equal.”
In other words, if Bank Rate moves as markets had been expecting
(the market pricing comes from 15 working days prior to the Report)
inflation is as likely to be above target as it is below.
Analysts who are using the Inflation Report to justify a May rate
hike prediction are citing this projection as key evidence in support of
their view.
King Denies Inflation Report Vindicates Market Rate Expectations
It would not, however, be a BOE Inflation Report if the message
coming out of it was that clear.
At his press conference King firmly rejected the idea the report
was “vindicating” market rate expectations.
“Some people are running ahead of themselves and saying that we are
pre-announcing, or laying the ground, for a rate rise. That decision has
not been taken and won’t be taken until we get to the next meeting or
the following meeting, or it may be many quarters. It will depend on the
facts,” King said.
King’s argument, as European Central Bank head Jean-Claude
Trichet’s mantra would say, is that a central bank does not “pre-commit”
to a rate hike. The Inflation Report, on this view, should not be
interpreted as a way of persuading the market to price in a rate
move, or moves, which the central bank subsequently delivers.
“I’m not going to say where interest rates will go. We don’t play
this game, we don’t take a decision in private and then hinting where
rates will go,” King said.
“Of course it’s important for markets to understand what might
happen with rates, but that is a judgement that they’re well-equipped to
make given their analysis of the economy and what they say and given
they know what our analysis is,” he added.
King also hammered home the message that things are highly unlikely
to evolve in line with the projections in the Inflation Report and the
MPC would follow the dictum of changing its mind when the facts change.
“Whatever looks a reasonable path today may turn out to be very
unreasonable in a few months’ time,” King said.
While the Inflation Report’s forecasts support gradual tightening,
if the MPC holds fire even until May things could change and the case
for tightening could fade, and the report itself states things are more
likely than not to evolve out of line with its central projections.
“At both the two- and three-year points, there is a roughly
three-in-four chance that inflation will be at least half a percentage
point away from the target,” the report says.
Throw in the fact the Inflation Report represents a compromise
between the divergent views of the nine-member Monetary Policy
Committee and it becomes an even less certain guide to future policy.
The report said there was a ‘wider than usual’ range of views among
MPC members on the inflation outlook and we know that at the January
meeting the MPC split three ways, with two members voting for a hike and
one for more QE.
King himself has, at least since the full horror of the credit
crunch became clear, been at the dovish end of the MPC spectrum and it
was hard to disentangle which of his remarks at the press conference
simply represent his own views or those of his colleagues on the
committee.
So while several analysts have brought forward their first rate
hike forecasts to May, either just prior to or after the Inflation
Report, others are sticking with their predictions of no move until May.
As Philip Shaw, economist at Investec said in a note, the BOE’s
communication policy is less nuanced than that of the Federal Reserve or
the European Central Bank.
The disparate nine-member MPC cannot speak with one voice, as even
King has been outvoted in the past and as Shaw says: “the meticulous
deconstruction of MPC statements and forecasts is usually unproductive.”
The Inflation Report does provide a detailed, model based
underpinning that could be used to justify future tightening. There is,
however, no guarantee over when it will be delivered.
The next key news event will be the publication of the February MPC
minutes on Feb 23. King’s acknowledgement of MPC divisions, and the
Inflation Report projections, make it inevitable those minutes will show
fault lines on the MPC – and there is a clear possibility more than two
members may have backed a hike this month.
–London Bureau; Tel: +44207 862 7491 email: drobinson@marketnews.com
[TOPICS: M$$BE$,M$B$$$]
