MNI INTERVIEW: BOE Should Hold In November - Sentance

With inflation set for a near-two-year high in September, the Bank of England needs to take stock and leave policy unchanged, and some policymakers may need to put the threat of higher rates back on the table, a  former Monetary Policy Committee member told MNI.

"I would hope that the MPC will hold off on further cuts and wait and see if some of the things that they're looking for, which they're hoping will reduce inflation, are going to come through," Andrew Sentance said in an interview. 

Despite August’s policy split, with a five-four vote for a cut after an unprecedented second vote, members’ comments suggest that disagreement centres on the speed of cuts and that they still expect rates to fall in coming quarters.

LABOUR MARKET

"The most substantive thing that the MPC are hanging on to see is what is happening in the labour market," said Sentance, who served on the MPC from 2006 to 2011.

More dovish members expect this to drive a decline in both headline inflation and inflation persistence from the fourth quarter.

"But, as [external MPC member] Catherine Mann pointed out last week, the labour market has softened, but it's not been in the way that is going to create some sort of dramatic movement, either in people's behaviour or in terms of wage and price setting," Sentance added.

"The MPC should be looking at the labour market and thinking  'good, our policy is working. Let's just keep rates where they are, as the labour market is softening.' That is the only way they will get pay growth down to something that's compatible with the 2% inflation target," he said. (See MNI INTERVIEW: UK Consumer Savings Still Drag on Economy- ONS)

Some members of the MPC may need to suggest tighter policy settings than those currently in place, he said.

"I think somebody, some member of the MPC or members, needs to put a shot across their bows by suggesting that rates could actually need to go up if inflation is not coming down, but I don't know whether any members feel strong enough to do that," Sentance said.

"I think at some point some MPC members need to break ranks and act as a counterweight to the dovish view of the majority.”

COMMUNICATION CHALLENGE

Policymakers also need to step back from their message that rates are still on a downward path, even if this could slow from the current pace of quarterly cuts.

"I would be arguing that the communication strategy has needed to change for a while, at least until inflation is more firmly on a downward course. I would argue that the governor and others should hold off from statements that suggest that interest rates are clearly on a downward course,” Sentance said.

"The last Monetary Policy Committee report seemed to say people shouldn't assume that we're committed to cutting interest rates, but some comments since still suggest the view is the path is lower, although the pace may vary.”

BUDGET CHALLENGES

The timing of the budget, almost three weeks after the Nov 6 policy meeting is another clear reason to keep rates unchanged this time, he said.

"Protocol is often, ahead of a budget, don't anticipate the budget, just wait and see what it delivers, rather than moving interest rates and then regretting it,” Sentance said.

"There's lots of talk about tax rises and public spending being reined in, though I think that's very unlikely. Under this government, they don't seem to know how to cut public spending, let alone implementing it," he said. (See MNI INTERVIEW: Uncertain Fiscal Boost From Taxing UK Pensions)

"So if I was on the MPC, I'd be arguing that this was another reason for holding off this meeting and not cutting interest rates."