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.

Go to: Recent Voter Comments ǀ Stress, Surveys and Data

Summary

• Recent comments from Bailey and Pill suggest that they have not changed their stance on needing hawkish data surprises to justify further hikes.
• Whether hard data releases will beat MPR expectations is the BoE’s focus right now. The bar looks quite high for an upside surprise.
• At this stage, I retain my base-case that the BoE will pause hikes from here. The true determinant will be labour market (14 March) and inflation (22 March) data, and the Spring Budget (15 March).

Current BoE Forecasts

Link to Most Recent BoE Meeting Minutes

Let the Data Do the Talking

The MPC is watching to see whether data will surprise to the hawkish side – something I noted as a necessary condition for them needing to hike again in March. The market, in pricing another 75bp in hikes, seems to have moved to the view instead that the MPC will err on the side of hawkishness ‘just in case’. This is not my read on the subject. Recent comments from Chief Economist Pill and Governor Bailey have only added to conviction that they remain largely unchanged in their data dependence.

Governor Bailey, speaking Wednesday 1 March:

• ‘Further tightening would be required if there were to be evidence of more persistent inflationary pressures’.
• ‘Economic data evolving much as we expected’
• Cautions against being done with hiking and also cautions against idea that they inevitably need to do more.

These comments align with my view that inflation (services in particular) overshoots and/or labour market surprises are necessary for a March hike, and that, so far, the mixed data has not allowed them to lean strongly one way or the other.

Chief Economist Pill speaking Thursday 2 March:

• No clear sign he has moved from being concerned about overtightening.
• Repeats lines from MPR (inflation skewed to upside in medium term, where their median forecast is significantly below target)
• Slight upside surprise in private pay growth data, but timely survey data suggests it will drop. Expect decline from Q2.
• Reiterates MPC expectation that unemployment will rise slowly.

We have also recently heard from hawk Mann (that monetary policy transmission has reduced and financial conditions are not tight enough) and dove Tenreyro (on lagged policy impact and the risk of overtightening). Neither offered much new to the debate and I continue to see the internal, neutral voices as much more important right now (Chart 1).

DMP: Price Outlook Re-Anchoring, Labour Market Mixed

Last week’s Decision Maker’s Panel survey (of UK businesses) provided some dovish signs of re-anchoring of inflation and (more importantly) price-setting expectations (Chart 2, and see appendix graphs). However, the labour market outlook was more mixed. On the one hand, there was a decline in expected pay growth – down to 5.7% for the next 12 months, now below the 6% MPR assumption (Chart 3). But the employment growth expectations, and recruiting difficulties measure have risen, bouncing back after recent declines. It suggests that employment growth may have been supported into the start of the year – something that could be concerning for a BoE heavily focused on labour market tightness (Charts 4 and 5).

Looking at the Data – What is Needed for a Surprise?

My base case remains, the March releases of inflation and/or labour market data will need to surprise hawkishly to justify more hikes. What does that look like?

Inflation

Services inflation is the priority. A significant (c+1.3%) MoM figure would be needed to get the value back to the MPR trajectory, given the miss in January (Charts 6 & 7). This is not beyond the pale, particularly if we see a rebound in the travel services component (-13.2% MoM in January), a complete reversal of January catering deflation, and the same kind of rise we saw in accommodation services last February. But further out, to beat the MPR trajectory it would need this trajectory to accelerate further into March/April (Chart 7).

Labour Market Data

Private-sector pay growth will probably be the most important aspect to watch. There, the BoE’s forecasts are ‘broadly consistent… [with] just under 6%’ growth in pay settlements. This is by no means a low growth rate. Base effects suggest that the YoY growth in regular private wages will continue its decline towards those numbers suggested by the surveys (see Chart 3). The unemployment rate will be less important given employment growth could trigger another move lower in unemployment, while the BoE is expecting unemployment to remain very low (staying at 3.8% through Q1).

Will the Budget See More Energy Support

The UK Spring budget (15 March) will be an important one to watch. The UK government must contend with a heavy deficit worsened by lower-than-expected energy surtax receipts, partially offset by lower energy price guarantee costs and a smaller than expected recession. On this basis, there could be a risk both that the Chancellor expands the scope of windfall taxes or that he extends the current £2,500 household energy price guarantee (it would otherwise rise to £3,000 from April; Chart 8). An increase in household energy support would further suppress near-term headline inflation, but the MPC would likely take it as hawkish.

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.

Photo Credit: depositphotos.com

(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.)