BoE Monitor: What Does the Chancellor’s Pivot Mean for the BoE?

Overview

This is our summary of recent comments from BoE MPC members, and an overview of the timely data we are looking at, to determine the path ahead for policy.

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Current BoE Forecasts

Link to Most Recent BoE Meeting Minutes

BoE Pricing Very Aggressive Even After Recent Paring

The BoE delivered its expected 50bp at its last meeting, but the ‘fiscal event’ (read: budget without OBR) stole the show. The subsequent GBP slide, and gilts crash required BoE intervention. We warned at the time this was more likely to be in gilts than anything to do with GBP, and the BoE subsequently delivered as much.

We don’t take the BoE’s buying in long-end gilts as a particularly dovish response. It was designed to quell market panic, and it did just that. That said, the hawkishness that the market has priced in has yet to really be backed up by BoE comments (Chart 1). While some of the move has been pared by the Chancellor’s walk-back and the fact that the BoE will not hike between meetings, the majority of the hawkishness remains (Chart 2).

Fiscal Stimulus Getting Less Generous

Taking the ‘responsibility’ out of the budget through omitting OBR input made the Chancellor no new friends. However, it did nothing to change the reality that unless his intention is to fudge fiscal balancing by promising spending cuts in 3 years’ time (i.e. a problem for the next government), the OBR’s assessment would always have dragged his lofty aims of deficit funding back to earth. With the humbling he’s received both within markets and his own party, a fudge right now would probably not cut it.

Instead, we expect that the walk-back of 45% tax rate cut will likely be followed up by other walk backs or tangible spending cuts. We would not rule out doing away with the triple-lock protection on pensions (raise them with wages rather than CPI next year, and drop the 2.5% floor).

The bringing forward of the budget balancing plan to 31 October has an interesting effect. It means it will now fall (just) before the BoE’s November meeting. Forecasts will be updated then, and so as much as possible will be included in their forecasts.

At this stage, the question within markets seems to be: if the BoE was teeing up for a 75bp November hike at the last meeting, and the need to hike has risen since, is 100bp now to be expected? That certainly seems to be what they are pricing.

BoE Hawks Supported by Surveys

Since the BoE’s intervention to save gilts, we have had a chance to hear from the most hawkish members of the BoE. Arch-hawk Mann continues to be focused on the rise in medium term inflation expectations, while Ramsden is focused on that, the government’s fiscal support, and the continued high inactivity in labour (which is driving the tightness). The labour market remains key for Haskel.

In short, the three main hawkish points remain: (1) scope of fiscal stimulus, (2) high inflation expectations, and (3) labour market tightness.

Why the Hawkishness May Not Last

Of these three lynchpins, we have noted above why fiscal policy should fade ahead as a rationale. Meanwhile, for inflation expectations, on the headline this argument will have been supported by the recent DMP survey outturn. It saw business owners’ estimates for three-year ahead CPI rise to 4.8% even while the trajectory is downward elsewhere (Chart 3). However, whether that can be taken as indicative of medium-term price setting intentions is unclear. At least in the year-ahead, there is a growing disparity between what businesses intend to raise prices by, and what they expect others to (Chart 4). It appears from it that while they, singularly, are looking into eating the reduced margins from unit cost growth, they assume others will be able to hike prices… clearly in aggregate they can’t both be right. Meanwhile, with the sell-off in linkers (which the BoE has moved to stem), the market-implied inflation pricing has also collapsed. This will probably put extra emphasis on survey data.

Finally, in the labour market. The tightness is clearly a consequence of higher inactivity. This inactivity has been led by rises in long-term illness, which has been on the rise since mid-2019. So what does that tell us ahead? Well for one thing, it says the hiring market’s not exactly firing on all cylinders. Hiring intentions (DMP survey) are already declining quickly. This in turn tends to pre-empt a similar move in growth of total employed (Chart 5). The lag in intentions to actual suggests there will be a further decline ahead in employment growth ahead. Meanwhile, on the activity side, the historical trend is that a declining savings ratio sends people back to look for jobs (Chart 6). With high energy prices and rising mortgage burden, the outlook for savings is not great.

Are We Seeing a Hawkish Shift in the MPC Centre?

Perhaps the most surprising of recent comments has been that of the more neutral Chief Economist, Pill. His last few speeches have closed with a line that the UK fiscal easing ‘will prompt a significant and necessary monetary policy response in November’. That has been taken to mean 100bp. It is hard to determine at this stage whether this is the case. Hence it will be something worth watching closely.

Clearly, at the September meeting, Pill felt 50bp was sufficient. At that time, the government’s energy price guarantee (EPG) was well telegraphed. By our calculations the entire budget would not add much to the inflation profile, and if the Chancellor is further walking back the stimulus, then this will be even more the case.

For now, we are watching the data closely. Comments from the centrists and the doves will be particularly important. On that front, Cunliffe, Bailey and Pill will be the most important this week (Chart 7).

Recent Voter Comments

Stress, Surveys and Economic Data

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)