MNI BOE WATCH: Fractured MPC Delivers 25 bps Cut On 2nd Vote

The Bank of England Monetary Policy Committee delivered the widely anticipated 25 basis point rate cut at its August meeting but only after an unprecedented second vote and by a narrower margin than any analyst had forecast publicly.

The messaging around the five-to-four vote was, unsurprisingly given the spread of views on the MPC, rather cloudy. The four members who voted for no change included the Bank's Chief Economist, Huw Pill, and Deputy Governor for Monetary Policy Clare Lombardelli, underscoring how there is no strong support for quarterly cuts even at the heart of the Bank.

Externals Megan Greene and Catherine Mann also supported leaving the policy rate on hold at 4.25% while external  member Alan Taylor initially backed a 50 bps cut, before supporting a 25 bps cut in the second vote in order to get a majority for some easing.

Although a sitting Governor can use a casting vote to decide a split vote, Andrew Bailey said he believed that was only appropriate when the nine member MPC did not have its full complement and an actual tie was possible. In this case, he said, it was clear the balance on the MPC was in favour of easing so a second vote was justified.

Following the policy announcement markets, which had been almost fully pricing in a November cut, unsurprisingly lowered the odds to only price in 16 or 17 bps of further easing by year end.

GUIDANCE

While the MPC's top guidance line, for a "gradual and careful approach" to easing was retained, the committee qualified it by noting that the degree of restrictiveness of policy had lessened and that the timing and pace of future would depend on the extent to which disinflationary pressures eased. The Committee has not had a unanimous vote since end-2021 and the divisions are showing clearly, with economic weakness and above target inflation making decision making difficult.

The Bank analysed the impact of quantitative tightening on gilt yields and liquidity to help inform the MPC's September decision on how much to reduce the stock of gilts by over the next 12 months, with the evidence indicating a case for cutting back on long-dated gilt sales, although QT so far has had only marginal effects.

"We think the cumulative effect on term premium of the QT to date, is now 15, to 25, basis points ...a modest impact," Deputy Governor Dave Ramsden said but he added that "we are very cognizant of developments in gilt markets."

SCENARIOS MOVE FROM CENTRE STAGE

The Bank, having said it would implement the reforms proposed by former Federal Reserve head Ben Bernanke, who recommended among other thing that it de-emphasize its central economic projections and highlight alternative economic scenarios, actually took a further step back on scenarios in August.

Having providing two illustrated scenarios in May the MPC analysis noted how May's upside, persistent inflation scenario was highly relevant but no new downside scenario was created and there were no numbers put out on any scenario.

Lombardelli, who is leading the work on implementing the Bernanke reforms said in response to a question from MNI that work was ongoing and "We never said it would be super quick ...the scenarios we have built we are using ... the policy debate and discussion is one that now has a much richer and more varied series of inputs going into it."

The central projections, still centre stage, showed modest yearly GDP growth of 1.3% in Q3 2026 and 1.5% in Q3 2027 with CPI at 2.7% in Q3 2026 and back at the 2.0% target in Q3 2027 on market rates.