MNI BOE WATCH: On Hold, Policy Guidance To Shift To Balanced

The Bank of England will almost inevitably scrap the rate cut markets had previously priced in for its March meeting and leave its policy rate on hold at 3.75%, with policy guidance re-written to reflect a shift towards neutrality.

With policy on hold and no new forecast round, the key features of the March decision announcement will be the Monetary Policy Summary and the summaries of individual members' views. All members have, so far, avoided any significant public comments on the implications of the energy price surge triggered by the Iran War and the Monetary Policy Committee is likely to play for time until it can complete a full forecast round and new scenario analysis ahead of its end-April meeting.

The following words from the February Monetary Policy Summary look destined to be thrown in the waste bin: “the risk from greater inflation persistence has continued to become less pronounced.” However, the second half of that sentence, that "some risks to inflation from weaker demand and a loosening labour market remain," is still justifiable, as the energy shock looks set to hit already-weak activity.

A key question for policymakers is whether to ditch, or qualify, the guidance that "Bank Rate is likely to be reduced further," with members having previously divided over the weight they place on recession risks, elevated inflation expectations and the likelihood of wage growth holding above target-consistent levels.  

One option would be to cut the line but still leave a reference to easing in the final summary, which read "The extent and timing of further easing in monetary policy will depend on the evolution of the outlook for inflation.” A mention could also be made here of geopolitical events.

FRAGMENTATION

The MPC members' votes and policy summaries are likely to highlight the fragmentation of views and individual policy-setting frameworks.

Many analysts expected a seven-to-two vote in favour of unchanged policy, with external members Swati Dhingra and Alan Taylor seen backing a cut. Wildcards are whether Catherine Mann, a self-described policy activist who had previously come close to backing fresh easing, could vote for a hike, or whether the MPC could unanimously back unchanged policy on the grounds things may be clearer at the following meeting.

Taylor and Dhingra have consistently voted for further easing, highlighting the downside inflation risks from the weakness of the economy. A hit to activity from higher energy prices could well result in even higher unemployment and demand weakness, and they could make the case that when the supply shock passes the downside risks will be even clearer.

On the other side, Mann and Megan Greene, who have placed more weight on inflation expectations and wage growth, could put the spotlight back on renewed risks of inflation persistence. Governor Andrew Bailey has been the key swing voter, but this time round he and senior Bank colleagues on the MPC may adopt a wait-and-see approach. With no press conference, his views on the likely policy path could remain opaque.