MNI BOE WATCH: Aug Rate Cut Looks Clear; Muddle On Messaging

The Bank of England Monetary Policy Committee looks set to cut Bank Rate by 25 basis points to 4.0% this month, but the vote could well split three-ways and policymakers have yet to state clearly where they are heading with alternative scenarios.

As an August cut is factored in by market participants, the focus will be on forward guidance and the vote split, with the key question whether there is any evidence of the MPC tilting towards stepping up or decelerating the pace of easing from one 25bps cut each quarter.

A safe option for the MPC would be to keep its current “gradual and careful” guidance but it conveys little information. Five of the nine MPC members have previously voted for faster or slower cuts than 25bps a quarter, with Chief Economist Huw Pill and policy "activist" Catherine Mann opposing quarterly easing and externals Alan Taylor and Swati Dhingra backing 50bps moves and Deputy Governor Dave Ramsden opting for two cuts in the previous quarter. Ramsden, notably, said he viewed his support for consecutive cuts as compatible with gradualism, highlighting the looseness of the term.

The MPC, which is aiming to place more weight on alternative scenarios and less on its central projection in line with the proposals in the Bernanke Review, could move to adjusting its guidance to highlight data dependency and noting that its policy approach will shift if either of its two scenarios, for persistent, higher inflation or lower inflation due to economic weakness and a widening output gap, materializes.

RATE PATHS

An unanswered question is whether the MPC will publish rate paths alongside alternative scenarios. There is a strong view, expressed by former BOE economists and some internally, that is incoherent to run alternative scenarios without alternative rate paths and that the numbers should be published.  (See: MNI INTERVIEW: Bernanke Forces BOE Rate Path Verdict - McMahon  - see MNI POLICY:  BOE Needs Scenario Rate Paths - Top Economists )

The legacy view at the Bank is that its credibility will be hurt if it does publish its internal rate paths but does not follow through on them and the issue is still unresolved. This month may be too early for a shift, although it was striking that Deputy Governor Clare Lombardelli did put some numbers on the alternative scenarios after the May forecast round, suggesting that the opposition to it internally is not hard baked.

The August meeting is likely to see MPC members discuss the upcoming September decision on the pace of asset sales as part of quantitative tightening, with an easing in the pace likely and there may be some reference to risk management, with the proportion of long-dated gilt sales likely to be cut. (See MNI INTERVIEW:  BOE To Cut Long Gilt Sales - Ex-MPC's Saunders   --  see MNI INTERVIEW: Lower Long Gilt Demand Risks Volatility - Miles )