MNI BOE WATCH: Seen On Hold, Upside Scenarios In Spotlight

The Bank of England is expected to leave policy on hold at its April meeting as the Monetary Policy Committee instead looks likely to put alternative scenarios centre stage, highlighting upside inflation and policy risks from the Iran conflict.

The rare unanimity in March's nine-nil vote for a hold could prove fleeting, with Chief Economist Huw Pill seen as the likeliest to back tightening. Still, he looks set to be in the minority this time, as Governor Andrew Bailey has restated that markets had got ahead of themselves in anticipating rate hikes.

A key dividing line on the MPC has been over how much weight members place on the risk of second-round effects from higher near-term inflation, particularly through wage rises. The Bank could publish separate scenarios with higher and lower pass-through effects from pay. (See MNI INTERVIEW: BOE Must Hike In Coming Months - Ex-MPC's Sentance)

For the first time, the Bank's Decision Makers Panel published its survey data before the MPC decision announcement, showing firms' expectations for year-ahead own-price increases and CPI inflation rise by one percentage point each between February and April's one-month readings.

FIRST LOOK AT PROJECTION

The MPC will publish its first central economic projection since the conflict began in its quarterly Monetary Policy Report. By convention, this would be based on average oil and gas futures curves across a 15-working day window through April 21, but these dates, which included news of a U.S.-Iran ceasefire, could arguably leave an optimistic central projection, leaving focus on how high the policy rate could go if upside risks materialise. The MPC is likely to attach alternative, rules-based rate paths to alternative projections, as it has done since November.

Pill and Deputy Governor Clare Lombardelli have both made the case for policy that is robust across scenarios, and from this perspective there is already a clear case for tightening. (See MNI INTERVIEW: Robust Policy Backs BOE Hike - Ex-MPC Saunders)

The BOE is also well aware of the limitations of focusing on alternative paths for gas and oil curves. Supply disruptions, shortages of specific products such as jet fuel and the variable wedge between curve and physical spot prices all matter - and the MPC could well highlight this in a box in the MPR.

COMMUNICATION VERY TRICKY

The MPC faces a tricky challenge in communicating a clear policy message. The nine members now set out individual precises of their views.

The guidance in March that "all members stood ready to act as necessary" was a trigger for repricing, with money market curves in the following days pricing in as much as 100 basis points of tightening.

If policy is left on hold, a reiteration of this language would be less likely to trigger a rapid repricing. At the time of writing, market participants were pricing 18bp of tightening through June and 60bp by year-end.