CORRECTS-MNI POLICY: BOE To Put Scenarios Centre Stage

(Corrects paragraph seven to make clear DMP data was for April, not March)

The Bank of England is likely to highlight alternative scenarios and deemphasise its central economic projection in communications accompanying what is likely to be a split April 30 rate decision, given deep uncertainty over the Iran war and its impact of inflation expectations and wage growth.

While it is set to again maintain Bank Rate at 3.75%, the unanimity of March’s decision is likely to be broken, with Chief Economist Huw Pill having made it clear he is considering a hike, and at least one other member, most probably Catherine Mann, joining him.

The scenarios are likely to incorporate different paths for energy prices, with varying second-round effects, an approach taken by Sweden’s Riksbank last month. In an environment in which energy prices are moving sharply in response to news, and with unusual dislocations between spot and physical markets, the Bank is aware that its customary approach of concentrating on a central projection premised on a 15-day average of oil and gas futures curves would be misguided. (MNI INTERVIEW: No Hike Delay If Shock Lasts-Riksbank's Thedeen)

In a speech in March, Pill called for policy which is “robust” across different scenarios, an approach which for him would argue for higher rates. His language echoed an earlier call by Deputy Governor Clare Lombardelli for using scenarios to make policy “more robust” across a wider range of outcomes, though she has said nothing publicly in recent days to signal which way she might vote at this week’s meeting. (See MNI INTERVIEW: Robust Policy Backs BOE Hike - Ex-MPC Saunders)

Other members of course might employ the robust approach and draw opposite conclusions. Alan Taylor, for one, has been sceptical of second-round effects, and so might find a more short-lived inflation scenario more plausible.

PRICE EXPECTATIONS JUMP

However, recent expectations data will have fed some policymakers' concerns, with short-term inflation ​expectations surging to 5.4% in March from 3.3% in ⁠February in the Citi YouGov survey.

The Banks's Decision Maker Panel survey published on Friday also showed that firms' year-ahead own price and CPI inflation expectations increased by one percentage point in the single-month April data, though their expectations for wage growth were unchanged as expectations for employment growth weakened slightly. Some MPC Members including Megan Greene have in recent weeks emphasised the importance of the DMP survey when making their decisions.

While the BOE is unlikely to do anything but hold this time round, future decisions may be more uncertain, and could again hinge on the vote of Governor Andrew Bailey. (See MNI INTERVIEW: BOE Must Hike In Coming Months-ExMPC's Sentance)

Soon after the March decision, Bailey told Reuters that markets were "getting ahead of themselves" after they priced in two hikes, noting that businesses have reported limited pricing power.

Deputy Governor Dave Ramsden, like Lombardelli, has kept his counsel ahead of the April meeting, which will provide the first Monetary Policy Report since the war started on Feb 28.

The Bank began publishing alternative scenarios last Nov 6, in an initiative led by Lombardelli in response to the Bernanke Review on its communications and modelling. These have included mechanically-modelled rate paths using policy rules, though some officials had earlier expressed reservations about publishing alternative rate paths.