LONDON (MNI) – It’s a close call, but the arguments previously put
forward by Bank of England Chief Economist Spencer Dale and Monetary
Policy Committee member Martin Weale for tighter monetary policy suggest
they could well have voted once again for a rate hike at the August MPC
meeting.

At the August meeting MPC members knew the growth outlook had taken
a turn for the worse, and that the upcoming August BOE Inflation Report
was set to show a markedly lower inflation profile. Dale and Weale,
however, have backed tighter policy despite highlighting the weakness of
the recovery, basing their arguments instead on concerns over inflation
expectations and supply side damage.

The BOE’s August Inflation Report projections would have given them
grounds to pull their rate hike calls, but it is open to question if
they joined the no change camp.

Analysts’ are divided over how Dale and Weale voted, with the
median forecast that both stuck with their hike calls and that there was
an unchanged seven to two vote at the August meeting in favour of
keeping Bank Rate on hold at 0.5%.

Dale and Weale have voted for rate hikes every month since
February and January respectively, while both have been very downbeat
about the UK’s economic outlook.

“I would like to tell you that this judgement (for higher Bank
Rate) was driven by ‘nice’ reasons. That I was confident that the
recovery would continue apace …. But I’m afraid these nice reasons
were not the factors driving my decision … In particular, I’m not at
all confident about the strength of the recovery,” Dale said, when he
first set out his arguments for a rate hike in a speech back in March.

Weale, in his succinctly titled “Why the Bank Rate should increase
now” speech in June, pointed out the UK economy could end up
experiencing the longest period of below peak output in the industrial
age.

It’s not as if the relatively modest downgrades to the growth
forecasts in the August Inflation Report have shaken Dale and Weale’s
Panglossian faith in a robust recovery.

The July MPC minutes showed both believed the case for a 25 basis
point rate hike was still strong despite a clear deterioration in the
economic outlook.

“For two members, the argument for removing some of the monetary
stimulus at this meeting had remained strong,” the minutes said.

“For them, the upside risks to inflation in the medium term from
global pricing pressures and the possibility that inflation expectations
could increase continued to outweigh the downside risk that the strength
of the recovery would be insufficient to eat into the economy’s
persistent margin of spare capacity,” the minutes added.

They acknowledged recent activity data had weakened in the UK and
overseas but argued that weaker growth was probably also damaging the
supply side.

“It was likely that the factors that lay behind the recent
softening had also negatively affected supply conditions, so their
impact on medium-term inflation was likely to be muted,” they stated.

If either was looking to the August Inflation Report to give them
the excuse to back out of their rate hike call, it is hard to see why
they would have said the case for a hike remained strong. And Dale, as
the central bank’s chief economist, is among the least likely people on
earth to have been surprised by the weakness of the BOE’s in-house
August forecasts.

Weale has also set out a tactical reasons for an early rate hike –
that it would show the MPC is committed to hitting its inflation target
and provide greater flexibility for the MPC in future, even allowing
the committee to cut Bank Rate if things get much worse.

While there is plenty of evidence to suggest Dale and Weale could
have stuck to their guns at the August meeting, the Inflation report’s
central inflation projections do provide, on the face of it, a strongest
case for keeping Bank Rate on hold.

The projections show that on a modal case inflation will undershoot
the 2.0% target two years ahead, coming in at around 1.8%, even if Bank
Rate is left unchanged at 0.5% this year and rises to just 0.7% in Q3
next year and 0.8% by Q4 next year.

Those forecasts do not support the case for near term tightening.

But Dale and Weale could still have based their rate hike case on
the upside inflation risks, and we know MPC members are divided over the
weight they place on these risks.

“There is a range of views among Committee members over the balance
of risks around the inflation outlook,” BOE Governor Mervyn King said in
his letter to Chancellor of the Exchequer George Osborne, published
Wednesday.

While market have been in a state of intensified turmoil in
recent weeks, much of this has happened since the MPC’s August meeting,
which took place on the third and fourth of the month.

The stockmarket slide, for example, only began on the opening day
of the MPC meeting, with the FTSE-100 falling 2.3% on August 3, and as
King says the MPC will be able to look more fully at the implications of
market turmoil at next month’s meeting.

“There have been significant movements in financial asset and
energy prices since the time of that (August MPC) meeting. The Committee
will continue to monitor those developments closely and will consider
their implications for the inflation outlook at its meeting in
September,” King said in Wednesday’s letter.

In August, analysts believe MPC member Adam Posen would have
remained isolated in voting for further quantitative easing.

The minutes of the August MPC meeting will be published at 0830 GMT
Wednesday.

–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

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