The MPC left monetary policy on hold at its meeting that ended yesterday, in line with prior expectations. However, this was not the uneventful meeting that we and many others had expected, with the MPC making three notably “hawkish” signals.
First, the vote to maintain the bank rate at 0.50% was 6-3, with Andy Haldane joining Ian McCafferty and Michael Saunders in voting for a 25 bp hike. We had expected the vote to be 7-2, in what would have been a repeat of the May vote. Often, an additional member voting for a hike has preceded a hike at the next Inflation Report meeting.
Second, the MPC minutes were tellingly sanguine about the recent macro data, when in fact the data was mixed. The Committee said domestically the data was “broadly consistent” with its May Inflation Report projections and that the weakness in the first quarter of 2018 “would prove temporary”. It said indicators of consumer spending had rebounded and employment growth remained strong. Despite the recent weakness in the official manufacturing data, the MPC continues to expect growth to rotate away from consumption and towards net trade and investment. It said the weakness in official manufacturing output in April may have reflected stockbuilding in the first quarter of 2018 due to temporary demand weakness. On inflation, the Committee expects it to be slightly higher in the near term than projected in May due to higher oil prices and weaker sterling. Importantly, all MPC members agreed that pay and domestic cost growth had “continued to firm broadly as expected” and spare capacity was now “largely used up”.
For the majority of MPC members, the news since its last meeting had given them “greater reassurance” that the weakness in the first quarter of 2018 was “largely temporary”, although they still saw “value in seeing how the data evolved from here”. For the three dissenters, they saw “some upside risks” to the expected upward path for pay growth.
Third, the MPC decided that now was the time to revise its guidance on the level of the bank rate at which the MPC would consider reducing the stock of QE, down to 1.5% from 2% previously. It explained this by saying that since the previous guidance was initiated, the MPC had revised down (in August 2016) the effective lower bound for the bank rate to close to – but a little above – zero (from 0.50% previously), which translates into a lower level for the bank rate from which the bank rate could be “materially cut”. While the MPC may argue that this is a technical clarification, the fact that they have actively discussed balance sheet reduction is itself a hawkish signal.The risk that the MPC hikes already later this year, and possibly as soon as August, have increased following today’s MPC minutes.
by MyFXspot.com, independent macroeconomic research for FX traders