BoE: MPC to look through inflation rise, but rhetoric likely to stay hawkish – Lloyds Bank

Michael Sawicki, Research Analyst at Lloyds Bank, explains that the BoE’s MPC March policy announcement saw Bank Rate and the other policy parameters left unchanged as the minutes released alongside repeated the readiness of policy to respond in either direction – an implicit ‘neutral’ policy bias relative to market expectations that currently fully discount a 25bp Bank Rate hike by 2018 Q4.

Key Quotes

“The key surprise in March was the dissent from external member Kristin Forbes, who voted for an immediate 25bp increase. The minutes also suggested that "some" other members may be receptive to a tighter policy stance, needing “relatively little” further upside news on activity or inflation for them to do so. Still, Forbes was always the likeliest candidate for the first mover for a hike, and she is due to leave the committee at the end of June. Meanwhile, Ian McCafferty’s signal value for the intentions of the rest of the MPC is diminished by crying "wolf" about hikes too many times before. While we consider McCafferty and Michael Saunders as the most plausible next candidates to vote for an early tightening, we do not yet see a majority assembling in support of such stance.”

“To be sure, ongoing economic resilience will test the willingness of some on the MPC to tolerate above-target inflation. Conversely, the MPC will also remain highly attuned to emerging signs of consumer weakness as sterling’s post-referendum drop reduces purchasing power. For now, evidence that wage growth remains muted – dipping to just 2.2% in the 3 months to January and so painting a relatively benign picture for domestically-generated inflation – is salving the appetite for tighter policy among the bulk of the MPC.”

“Meanwhile, the possibility of a disorderly exit from the EU – should a new exit deal with the EU not be agreed within the two-year timeframe stipulated by Article 50 – would clearly impact on the policy outlook. In our view, the bulk of the MPC will be wary of reversing the stimulus of August 2016 prematurely only to risk being pushed into another round of loosening later down the line. Even if inflation rises above 3% around the end of 2017 we expect that a majority on the MPC for a tightening will fail to coalesce. Indeed, if hawkish dissents cause some additional firming of market-implied interest expectations and the currency, alongside any rise in term rates led by global factors, these seem likely to obviate the need for any actual policy tightening before the UK’s EU exit.”