MNI BOE WATCH: Narrow Vote For Cut, Close Calls Ahead

The Bank of England cut its policy rate by 25 basis points in December by the narrowest possible margin, with a five-to-four vote in the Monetary Policy Committee, and said that the case for further easing was becoming more finely balanced.

Governor Andrew Bailey, as widely expected, was the key swing voter, switching from the no-change camp in November to support December's cut. The other four members of the no-change camp held firm despite recent softer-than-expected inflation data and rising unemployment.

"On the basis of the current evidence, Bank Rate is likely to continue on a gradual downward path. But judgements around further policy easing will become a closer call," the MPC said in its policy summary.

Bailey said recent data suggested that "disinflation is now more established" and that upside risks had eased.

He noted the rise in unemployment and underemployment and that while he did not see conclusive evidence of a sharper slowdown in the labour market vigilance was required.

RISKS

Catherine Mann, who has been perceived as among the most hawkish MPC members though she describes herself as a policy rate activist, echoed Bailey's concerns over the labour market risks.

"My decision was quite finely balanced,” she said, adding that while inflation remained above target and household inflation expectations were elevated she worried that falling private sector employment and soft output could be signs of "a non-linear adjustment" - that is a sharp downturn.

Other members of the no-change camp continued to see risks of inflation staying elevated in part because of structural, supply-side weakness.

Chief Economist Huw Pill said the risk of inflation stabilising at above-target levels due to structural changes in wage and price setting were greater than of it falling below target, while Deputy Governor Clare Lombardelli said that she worried about more about upside risks.

On the doves’ side, Alan Taylor said that recent news supported his view that inflation would fall back to target before the MPC's central forecast and he called for the Bank to get the policy rate back to around neutral, at 3%, "sooner rather than later."

The other doves, Deputy Governor Sarah Breeden and Dave Ramsden, and independent Swathi Dhingra, all saw disinflation continuing but the latter said strong forward-looking pay surveys gave him pause for thought.