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Livesquawk - BoE Preview: MPC Hawks Appear To Be Winning Inflation Argument
BoE Preview: MPC Hawks Appear To Be Winning Inflation Argument

MPC set to maintain interest rate at 0.10% 

QE forecast to remain at GBP 895bln, but dissention expected 

Saunders or Ramsden expected to dissent 

Rate decision and statement due Thursday at 11:00 GMT 



By Harry Daniels 

LiveSquawk News 




22 September 2021 | 11:00 GMT 



LONDON – In a busy week of central bank announcements (19 in all), the Bank of England’s rate setting committee is expected to stay the course keep and its powder dry this month, despite growing signs of more hawkish assertions amongst several members.  


The BoE’s Monetary Policy Committee (MPC) is set to leave its headline interest rate at 0.1% and its asset purchase programme at GBP 895bln on Thursday. Analysts say they expect a unanimous vote to keep policy rate settings on hold, alongside a potential 8-1 vote split to leave the asset purchase targets unchanged, with dissention likely from either Michael Saunders or Dave Ramsden. Catherine Mann (external member) and Huw Pill (chief economist) will be attending their first meeting as members of the committee.  


The BoE’s decision announcement is set to come hot on the heels of the FOMC rate decision Wednesday evening, with both beset by similar economic concerns: slowing growth and accelerating inflation. The Covid-19 Delta variant has proved a headwind on the route to recovery, as has the expiration of a number of schemes employed to soften the economic blow from the global pandemic.   


Christian Schulz of Citi research noted that like other central banks, the BoE is facing strong activity growth and shortages that are contributing to above-target inflation. “However, unlike the Fed or ECB, the BoE is already guiding towards a rate hike and has such optimistic growth forecasts that short-term risks may now be skewed to the downside. With two new members joining, the furlough scheme still running, fiscal policy evolving and new bank forecasts six weeks away, the September meeting is unlikely to give a clear steer on the next policy steps.” 


Data has deteriorated

Economic activity since the August Monetary Policy Report has been disappointing. GDP growth in the second quarter undershot bank projections, printing at 4.8% quarter-on-quarter (BoE 5.0% - downwardly revised from 5.5% in the June MPR). Citi’s Schulz said, “The quality of growth was also relatively poor – with all accounted for by public and private consumption, and little by way of investment.” 


However, there are pockets of positivity. The labour market has continued to tighten, defying experts’ predictions of high unemployment. 


How transitory are current prices?

“Transitory” is a phrase often used by central bankers to explain away the current high inflation environment. Supply concerns around the low availability of shipping containers, mixed with increased fuel costs have caused production cuts across a range of products. In recent days there has been a global spike in wholesale gas prices, which has exasperated the situation further. Sanjay Raja, senior economist at Deutsche Bank Research warned, “We're still not out of the woods yet when it comes to supply issues. Core goods prices could remain supported for some more time, particularly with input shortages continuing in certain baskets (eg cars).  

“Services prices will also likely see some support as a result of rising wage growth across hospitality and leisure.”  


In their annual reports to the Treasury Select Committee, both MPC members, Dave Ramsden and Silvana Tenreyro acknowledged that the main causes of the price pick-up were well understood. They noted annual inflation was affected not only by base effects, but also strong global demand for goods as the world reopened following lockdown.  


Tenreyro said, “In all, I see some of the recent inflation readings as examples of the volatility in the data brought about by the pandemic. Extracting the signal from the noise will be challenging, but crucial, as we observe the data in the coming months.” 


Ramsden noted, “Overall I think the risks to the outlook for activity and inflation are two-sided. In terms of the two alternative scenarios, I put more weight on the inflationary than the disinflationary one. However, many uncertainties remain, for the UK and globally.” 


New members Huw Pill and Catherine Mann are expected to side with the majority at their first meeting and there will be a level of interest as to where they sit in terms of policy stance. 


“The big question for markets is whether high inflation will force the MPC to act a lot sooner than market pricing implied back in August,” posited Deutsche’s Raja. “We don't think so. While our base case is for a rate hike in summer next year (with risks tilted to a May lift-off), the bank has bought itself a lot of flexibility in delaying any policy response to the surge in inflation.” 


For now, analysts say the MPC can remain patient, waiting to see how both the end of the furlough scheme unfolds as well as how the health outlook evolves in the coming months.