The Bank of England’s latest decision on interest rates is announced on Thursday. Here’s my take. (TL;DR – I predict a ‘dovish hold’, albeit with a couple of nagging worries.)
The markets are almost certainly right to expect ‘no change’ this week, with the Bank’s key rate left at 4½%. After cutting by ¼% in February, the MPC will surely want to stick to their “gradual and careful approach” and wait until the next quarterly forecast round in May before cutting again.
There can be good times to surprise the markets but, with so much global uncertainty at the moment (thanks, Mr President!), this probably isn’t one of them.
Moreover, the economic data since the last meeting have largely been stronger than anticipated in the February Monetary Policy Report. While January’s monthly GDP figure was disappointing, this was more than offset by the upside surprise in December.
CPI inflation has also been higher than expected and could now hit 4% in the April data, compared to the Bank’s February forecast of a peak of 3.7% in the third quarter.
In this respect, the markets are probably also right to pay attention to the views of Dave Ramsden, previously one of the more dovish members of the MPC. In a speech last month he said…
“I am now less certain than I was about the outlook for the UK labour market, and its implications for future inflation persistence and growth. Because of the evidence of recent months, I no longer think that risks to hitting the 2% inflation target sustainably in the medium term are to the downside. Instead, I think they are two sided, reflecting the potential for more inflationary as well as disinflationary scenarios.”
Nonetheless, I would not be surprised to see at least one or two dissenters voting for a cut this week. Remember two members (Swati Dhingra and Catherine Mann) voted for a bigger ½% cut last month, so you might say the level of rates is still too ¼% too high for them.
Other signals from the Bank suggest that most members are still more worried about the downside risks to growth than the upside risks to inflation – as long as any jump in the latter is only temporary. Consistent with this, the OECD is latest of many organisations to revise down their forecasts for global activity as trade wars break out. Even Ramsden conceded that “I do, though, think the core disinflationary process remains intact.”
A 7-2 split (hold vs. cut) would be marginally more dovish that the markets expect, and help to reinforce expectations of a rate cut in May, especially in the wake of what is likely to be a tight emergency Budget (sorry, ‘Spring Statement’) on 26 March and the Spending Review. The accompanying commentary could help too.
But there are still two nagging worries in the back of my mind. One is that tone of the statement this week might turn a little more hawkish, or at least towards a more neutral stance (rather like that now taken by Ramsden),
The other concern is that the key April data will not be available until after the May meeting: the MPC votes on 7 May (with the decision announced on 8 May), but the March/April labour data are not released until 13 May, Q1 GDP on 15 May, and we will have to wait for 21 May for the April CPI.
Monetary policy is supposed to be forward looking, so the MPC should still be able to take a decision (and cut) in May based on the updated forecasts and the latest news on underlying price pressures. This week, though, I wouldn’t criticise the majority too much for holding tight.
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