–Minutes Reveal Shift Towards Hawks As Weale Backs Hike
–‘Some’ MPC Said Unchanged Jan Decision Was ‘Finely Balanced’
–Comments From BOE Governor Suggest He Is Not Convinced By Hike Need
–Other BOE Insiders May Become Concerned Enough To Back Hike

LONDON (MNI), Jan 26 – The minutes for the January meeting of the
Bank of England Monetary Policy Committee published today suggested a
further shift in a hawkish direction in the light of high recent
inflation outturns.

Lonely inflation vigilante Andrew Sentance was joined by another
external member, Martin Weale, entailing a hike at any meeting from
February through May, after which Sentance leaves, would need the
support of just three more MPC members. The minutes suggested it could
be a close call, with some who backed no change saying it was a ‘finely
balanced’ decision.

For Sentance and Weale – “The evidence suggested that the balance
of risk was already sufficiently clear to warrant an immediate increase
in Bank Rate. The continued elevated rate of inflation, which was
forecast to persist, posed a significant risk to inflation expectations
and hence to the medium-term outlook for inflation”.

The minutes showed even Adam Posen, who voted again for a further
stg50 billion of quantitative easing, has set out an exit strategy. He
acknowledged that a sustained increase in commodity prices and a change
in sterling sentiment could start to outweigh the domestic forces
pushing down on inflation, although he “did not see this risk as yet
large enough to require a policy tightening.”

Weale, Sentance and Posen aside, further gradations of views were
evident in the minutes which revealed a “spectrum” of views among
the majority no change camp.

“For most members, recent developments implied that the risks to
inflation in the medium term had probably shifted upwards,” they said.

Within the majority group there was a sub-group which was readier
to hike rates than others – “For some of those members, the decision
this month was finely balanced.”

That suggests, on the face of it, further members of the MPC could
be expected to join the hike group in coming months.

BOE Deputy Governor for Monetary Policy Charles Bean could be one
of those, given his ‘proverbial hawks’ comment in December, although he
also conceded back then that further QE could be prompted in the event
of a new downward twist in the euro zone debt crisis, although qualms
on that score may have eased in recent weeks.

Another potential recruit for the hawk camp is BOE Chief Economist
Spencer Dale, who has highlighted the risk that if inflation remains
persistently high, inflation expectations will rise and MPC rhetoric
about it coming back down in the medium term will fall on deaf ears.

“We can come up with all sorts of clever reasons to explain our
view, but at some point people will say ‘inflation just seems to be
higher than it used to be’ and that is a very substantial risk,” he told
the Independent newspaper last summer.

Those who appear to be set on holding the unchanged policy line are
BOE Governor Mervyn King and Executive Director Markets Paul Fisher.

In a pre-Christmas interview Fisher suggested that the MPC would
continue to take the line that inflation was being boosted by a series
of big but one-off effects which should not be key to a
medium-term-orientated policy.

“We can’t get too concerned about the short-term inflation rate,
over which we have no control,” he told the Telegraph.

Minutes Overtaken By Q4 GDP Data ?

The minutes of the MPC’s January meeting, which took place on
January 12 and 13, come with a very large caveat.

At the meeting the committee had no sight of the stunningly weak
first estimate for Q4 GDP, which showed a 0.5% fall on the quarter.
National Statistics said that stripping the snow impact from the numbers
would still leave the quarterly change flat. And – as Chancellor of the
Exchequer George Osborne pointed out – the looming fiscal retrenchment
had not been a factor in the GDP report.

The MPC will surely want to wait for at least another quarter’s GDP
numbers before making a judgement on the state of the recovery through
the turn of the year, with the first estimate of Q1 GDP out in April.

King’s keynote address in Newcastle Tuesday, after the GDP data
came out, was more apropos of the current situation than the minutes.

That speech was clearly dovish – although it is difficult to know
how far the governor spoke purely for himself and how far the speech was
meant as a retrospective vindication of past MPC policy actions, namely
that of keeping policy ultra-easy through 2009-10, in the face of
embarrassingly high recent CPI outturns.

While the governor’s comments are hardly likely to be those of an
MPC outrider he has ended up on the losing side before and even BOE
“insiders”, including Dale, have voted against him.

In his speech King stressed how important it was for the MPC to
communicate on policy and get across the “the big picture” – of external
shocks driving up inflation while the MPC remains committed to the
inflation target.

The governor was sticking to the Bank’s well-worn message –
inflation will fall back – ‘trust us’ being the leitmotif of the
speech. Answering those critics within the MPC who argue that the
committee is in danger of losing credibility, King’s response was:

“We shall try even harder to explain the basis for policy
decisions. Credibility was not earned in a year, and it will not be lost
in a year. It is the result of experience over a number of years.”

King’s view on the importance of communication sits very uneasily
with Dale’s belief that in the end people will simply stop listening to
fancy explanations for high inflation outturns.

King said high current inflation and critical media coverage would
not influence policy. Indeed, he played down many of the sources of
angst which seem to be fraying the nerves of the more hawkish members of
the MPC, downplaying the rise in household inflation expectations and
the risk to MPC credibility.

He played down GDP data shock, describing it as a mere reminder of
his previous caution that the recovery would be ‘choppy’.

Where the minutes and King were at one was on the key role of the
forthcoming February Inflation Report (due Feb. 16) for policy setting.

The minutes said the “February Inflation Report projections would
provide an opportunity to assess fully the developments since the
previous Report, and to evaluate more thoroughly the risks to inflation
in the medium term” and give the MPC the chance to “fully explain …
its assessment of the outlook and its policy decisions”.

King said “Should Bank Rate rise now? The answer depends on the
outlook for inflation in the medium term, and the MPC will set out its
judgement in full in our February Inflation Report”.

After the GDP shock a February move looks highly unlikely. Still,
the minutes make clear that the MPC majority for unchanged policy is now
being chipped away but the heightened sense of downside growth risks
post-Q4 GDP may make the erosion of that majority a more
drawn-out affair.

The combination of the more hawkish-than-expected minutes and the
much weaker-than-expected Q4 GDP data have left money markets uncertain
over the next MPC move. On one estimate, they are now pricing in a 50%
chance of a hike in May, with the first expected around August.

–London newsroom: 4420 7862 7491; email: ukeditorial@marketnews.com

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