MNI BOE WATCH: MPC Fractured, With Governor Bailey Key To Cut

The Bank of England's nine strong Monetary Policy Committee looks set to fracture once again over a rate cut, with Governor Andrew Bailey widely expected by analysts to deliver the key swing vote in favour of easing policy.

Market pricing puts around a 90% chance on a 25 basis point cut when the decision is announced on Thursday, even though a sizeable majority of analysts predict that it will be delivered by the narrowest possible margin of a five-to-four vote .

In November, 4 members voted unsuccessfully for a 25 bps cut in Bank Rate to 3.75%, and assuming they repeat that vote, if Bailey alone changes sides it will be enough.

MORE EVIDENCE

The BOE Governor, however, has stressed that he needs to see more evidence of inflation easing before backing a cut. With fresh labour market data due out on Tuesday and consumer price data out on Wednesday, uncertainty remains high.

A key Bailey quote aligning him the doves came in his summation of his views in the November MPC minutes when he said "I find the mechanisms underlying upside risks less convincing than those underlying the downside." 

The hawkish camp on the MPC has placed greater weight on the likelihood of more persistent inflation although there is no agreement among them on the mechanism behind it. One mechanism is elevated inflation expectations influencing wage and price-setting and another structural, supply-side weakness. (see MNI INTERVIEW: Inflation Expectations Resisted BOE Hikes-Weale )

Some analysts have cited Deputy Governor Clare Lombardelli as a plausible switch to the rate cut camp. However, in evidence to the Treasury Select Committee on Dec 9 she said "I am worried about both [inflation persistence and labour market weakness], but I worry more about the upside risks to inflation," seemingly tilting away from supporting a cut.

Independent MPC members Megan Greene and Catherine Mann have recently signaled once again their opposition to easing and Chief Economist Huw Pill has consistently made the case for caution.

BUDGET NO GAME CHANGER

The MPC's December meeting will be the first at which it can factor in the Nov 26 Budget, but it looks unlikely to shift the policy dial. While the Bank takes fiscal policy as given in its forecasts, MPC members can interpret it however they want and views appear divided.

Lombardelli told the TSC that the Budget's biggest impact was the direct impact on near-term inflation, which it would lower by between 0.4% and 0.5% in the 12 months from from Q@ 2026, reflecting administered price changes on energy, electric vehicles, rail and fuel duties. Mann, however, noted that near term the fiscal stance more expansionary than in the previous Budget and the fiscal consolidation was backloaded, which she said experience showed would be very difficult to deliver.