–Minutes Show Rate Hike Camp Nearer To Securing A Majority
–May Still Likely Timing For Hike Given April Q1 GDP Release
–But Hike Before May Now Cannot Be Ruled Out If Data Flow Strong
LONDON (MNI), Feb 23 – Minutes from the February meeting of the
Bank of England Monetary Policy Committee leave little scope for doubt
that the UK central bank will begin to tighten policy within the next
three months – unless upcoming data show the recovery stalling.
The minutes showed Bank of England Chief Economist Spencer Dale
joining External Member Martin Weale in support of a small, 25 basis
point rate increase. Andrew Sentance – who has for so long been a lone
voice in the wilderness – upped the ante by urging a 50bps rise.
“For three members, the case for removing some monetary stimulus at
this meeting was compelling,” the minutes said.
Markets had been speculating since the middle of last week that a
senior BOE official could be ready to join the rate hike camp, with BOE
Deputy Governor Charles Bean and also Dale being seen as possible
suspects.
For once, the speculation was borne out.
More importantly, the minutes make clear that a majority are now
agreed that the case for a rate hike has been bolstered by the recent
data and newsflow.
“Most members agreed that the balance of risks to inflation in the
medium term relative to the target had moved upwards in recent months
and that the case for withdrawing some of the current exceptionally
accommodative monetary policy had consequently been strengthened”.
The minutes are clear that there remains a group of more resolute
doves – “others considered that the chances of this risk materialising
remained limited, given that the change in the near-term outlook could
be clearly explained by reference to recent increases in energy, other
commodity and world export prices”.
But these doves have become outnumbered by those backing a hike and
those who are getting nearer to backing a rate hike. Who is in this
dovish group apart from Adam Posen and, maybe, Governor Mervyn King is
uncertain.
What held back those members who could have turned that group of
three hawks into a majority of five or more? The minutes make clear that
the 0.5% contraction in Q4 GDP had been a key factor. For these swing
MPC voters, watching the data will be the name of the game over the next
few months.
This group seemed to take a straightforward reading of the
Inflation Report’s ‘best collective judgement’ that “inflation was
roughly as likely to be above or below target in the medium term”.
And they also noted that those projections had been “conditioned on
a path for market interest rates which assumed an increase in Bank Rate
around the middle of the year”.
The February IR showed Bank Rate rising to 0.7% in Q2 from its
current 0.5% level.
Doubts among the swing group about an immediate rise in rates
appear merely tactical and relate to the costs involved in a precipitate
rate rise which subsequently has to be reversed – as well as ones of
timing and data releases.
“Given the potentially disruptive impact of reversing any immediate
change in Bank Rate, there was merit in waiting to see indicators of how
the economy performed at the start of the year to help assess whether or
not the decline in GDP in the fourth quarter presaged sustained economic
weakness. A rise at this juncture could damage household and consumer
confidence, which remained fragile”.
Those remarks would still favour a May hike, given that Q1 GDP data
will only be released on April 27, although the more high-frequency
survey data, such as the Markit/CIPS PMI series as well as the
Confederation of British Industry surveys have already pointed to a
rebound in activity at the start of the year, particularly in
manufacturing. Those surveys have also pointed to intensifying cost and
price pressures.
Should the data flow remain positive, more MPC members could well
join the hike group in the coming months and although May still has to
be the most likely month, there is an increasing risk that the
majority’s trigger finger may start to get itchy.
Deputy Governor Monetary Policy Charles Bean has been open in
recent speeches and interviews about his hawkish leanings and fellow
Deputy Governor Paul Tucker too has expressed his concern about rising
inflation.
In comments to Radio Bristol, Tucker talked about a small hike,
even though he has not been a rate hike cheerleader.
“Inflation is a worry, there’s no doubt about that…We face a real
dilemma over interest rates over the next few months,” Tucker said.
He continued:
“The question we face isn’t to make a violent increase in interest
rates, it’s whether or not to take away just a little bit of the
stimulus we’ve been supplying the economy for the last few years. So
this is a delicate balance but it’s not dramatic in either direction.”
Tucker also noted that recent developments in the Middle East and
North Africa region were also likely to lead to further upward pressure
on oil prices, although he made clear that he would not want to do
anything to threaten the recovery.
Bean, on the other hand, has said that should oil and commodity
prices continue to climb, then rates may have to rise regardless. This
scenario would amount to a ‘bad rate hike’ rather than a ‘good rate
hike’ which would be a response to improving economic data.
The more opaque views of another member of the MPC – David Miles –
may become clearer in a speech Wednesday, helping us to identify whether
he is one of those members on the brink.
Following the publication of the minutes City economists who had
been predicting a May hike expressed increased confidence in the call.
UBS moved its first hike call forward from August to May and even
Capital Economics, which had long been predicting a protracted period of
unchanged rates, put the chance of a May hike at 50/50.
–London newsroom: 4420 7862 7492; email: ukeditorial@marketnews.com
[TOPICS: M$B$$$,M$$BE$]
