UK: More MPC members tilt towards a hike

Today the Bank of England (BoE) released the minutes from its July meeting. As expected, the Monetary Policy Committee (MPC) voted unanimously in favour of keeping the Bank Rate and the stock of purchased assets unchanged at 0.50% and GBP375bn, respectively.

There were many discussions about wage growth and domestic costs as average weekly earnings have picked up more than expected in recent months. The members disagreed about whether the pickup was a sign of increasing inflationary pressure or not. For ‘some members’ it was a sign that ‘inflation might reach the 2% target sooner than anticipated’, for others not. Hence, wage growth figures will continue to attract much attention in the coming months as wage growth remains a key determinant for the timing of the first hike.

The appreciation of sterling in recent months pulls in the other direction through lower import prices, although ‘the speed and the degree of pass-through from movements in sterling was uncertain’. The central question is whether the pickup in domestic costs is ‘sufficient’ to offset the ‘drag from the appreciation of sterling’.

The decline in inflation from 0.1% in April to 0.0% in May was expected by the bank and hence inflation is developing in line with expectations. Bank staff still expect inflation to pick up at the end of the year, when the falls in commodity and food prices begin to drop out. We share this view.

The MPC members noticed the upward revision of GDP growth in Q1. Bank staff expect GDP growth to pick up to around 0.7 % q/q in both Q2 and Q3.

In line with recent MPC comments, the minutes reveal that an increasing number of MPC members are tilting towards a hike. The minutes state that ‘For a number of members, the balance of risks to medium-term inflation relative to the 2% target was becoming more skewed to the upside at the current level of Bank Rate. For these members, the uncertainty caused by recent developments in Greece was a very material factor in their decisions: absent that uncertainty, the decision between holding Bank Rate at its current level versus a small increase was becoming more finely balanced.’ In the recent minutes it was only two members (most likely the two hawks Ian McCafferty and Martin Weale) for whom the decision was ‘finely balanced’.

As a deal between Greece and its creditors was finalised last week, we have got rid of a large amount of uncertainty for ‘a number of members’. This supports our nonconsensus view that Bank of England will hike in November this year.

However, as mentioned by governor Mark Carney, there are still headwinds to the economy. These include ‘weakness in Europe, the strength of sterling and the prospect of the largest fiscal adjustment of any advanced economy over the next five years’. In our view, also the timing of the first Fed hike will be important as we expect BoE prefers to raise interest rates after Fed.

The MPC’s August meeting will be very important as this will be the first time that we have the new ‘Super Thursday’ setup. The policy announcement, minutes and the new Inflation Report will all be released at the same time. We expect the two hawks, Martin Weale and Ian McCafferty, to vote in favour of increasing the Bank Rate at this meeting. It will be interesting to see how the deal between Greece and its creditors has affected the views of the MPC members as this was a ‘material factor’ at the July meeting. The new projections in the Inflation Report, including the effects of the government’s fiscal plans, will also attract attention.