BOE Snapshot – How will new members change their perspective on rate hike terms?
Economic developments since the last meeting have raised fears of ‘stagflation’ in the UK, ie slow growth with high inflation. As the main constraint to growth is the supply chain, we don’t expect this to derail the BOC’s monetary policy stance. We expect the central bank to vote unanimously to leave the policy rate unchanged at 0.1% and 8-1 to keep the asset purchase program at £ 875 billion. The BOE also split in August over whether the basic conditions for the rate hike were met. The objective of this meeting is to find out if and how the two new members of the committee would affect this balance. The data feed released since the last meeting has sent a mixed picture on the economic outlook. On the positive side, the job market continued to thrive. The unemployment rate fell further to 4.6% in the three months to July. At the same time, the number of employees gained + 241K to 29.1M in August. This marks a return to pre-pandemic (February 2020) levels. Job vacancies hit a record 1.034 million from June to August 2021. Inflation has further strengthened. The headline CPI jumped + 3.2% y / y in August, up from + 2% a month ago. The market had anticipated a jump to + 2.9%. It should also be noted that the increase of 1.2 ppts was the largest ever recorded. The ONS continued to warn of the temporary nature of high price levels. Core CPI rose to + 3.1% year-on-year from + 1.9% in July, beating the consensus of 2.9%.
On the other hand, GDP growth slowed to + 0.1% m / m in July, down from + 1% a month ago. PMI data also shows that the service and manufacturing sectors are losing momentum. The services PMI fell -4.6 points to 55 in August. While remaining in expansionist territory, the reading marks the slowest since February. The manufacturing PMI also fell to 60.3 in August, from 60.4% a month ago. However, the slowdown in economic activities is mainly due to the disruption of the supply chain, rather than demand.
We expect the BOE to vote unanimously to leave the policy rate unchanged at 0.1% and 8-1 to keep the asset purchase program at £ 875 billion. Michael Saunders will likely disagree as he prefers to end the program earlier. What interests us most is members’ views on whether the economic conditions are right for a tightening. Earlier this month, Gov. Andrew Bailey said four of the eight MPC members who voted in August felt some initial conditions for the tightening were met. The governor himself, Dave Ramsden, Ben Broadbent and Silvana Tenreyro are among the hawks. With the departure of hawkish member Andy Haldane, the MPC will be joined by two new officials, chief economist Huw Pill and external member Catherine Mann. Their position is worth watching. It should be noted, however, that a majority of members judging that the necessary minimum conditions are met would not automatically trigger a rate hike. As Bailey noted, the directive is a “necessary but not sufficient condition for raising interest rates.”