Posted on February - 23 - 2011
UK: One more Bank of England hawk hatched out
Bank of England (BoE) Minutes showed that a larger fraction of the Monetary Policy Committee (MPC) preferred to raise the UK base rate at the meeting on 10 February. Spencer Dale, BoE Chief Economist, preferred a 25bp rate hike and thereby an end to the ultra-loose monetary stance. The majority of the MPC – five members – voted for unchanged rates, two members preferred a 25bp hike, while one member preferred a 50bp hike and wanted more quantitative easing.
It is likely in our view that Charles Bean, Deputy Governor and former BoE Chief Economist, will join the hawkish camp in the near future, perhaps already in March. Paul Tucker, the Bank of England Deputy governor, also sounded somewhat hawkish yesterday saying that “inflation is a worry, there is no doubt about that” and added that “the question we face isn’t to make a violent increase in interest rates, its whether or not to take away just a little bit of the stimulus that we’ve been applying to the economy over the last few years”.
At the January meeting, MPC member Martin Weale, former NIESR Director, emerged as hawk, joining Andrew Sentance, former BA Chief Economist and now MPC überhawk, in calling for a 25bp rate hike. The probability of a 25bp rate hike over the next three months derived from the SONIA curve rose from around 30% to around 45%.
Despite three members now preferring to tighten monetary policy, we don’t think a hike is just around the corner. The comparison might be an exaggeration, but it takes a while to turn a super tanker and it is not obvious to us that the UK economy is prepared for higher borrowing costs. However, if another member votes for a rate hike at the next meeting and economic data improve – Q4 GDP is likely to be revised some 0.2pp higher on Friday and Q1 might be quite strong – the likelihood of a May hike, fully priced in markets already, increases in our view. Everything depends on economic data from now on as most have accepted that inflation will remain elevated for a prolonged period. Biggest risk comes from private consumption.
In a speech in Oxford yesterday, Adam Posen, the Bank of England’s arch-dove, said that “We must make policy based on the best available forecast” and “not be tyrannized by popular fears or spectres of expectations”. Posen is now relatively isolated in the MPC and will at some point probably be overruled as he wants to keep the base rate unchanged for a long time.
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