Bank of England May Shift Tone While Keeping Policy on Hold

The Bank of England won’t budge on policy next week, though it could present a shift in tone.

In the six weeks since the Monetary Policy Committee’s last decision, the economy has performed broadly as the bank expected and there have been tentative signs of a long-awaited pickup in wage growth. At the same time, the pound’s renewed decline could further fuel inflation concerns.

The meeting will be the first where the MPC has a full complement of nine members since March. Economists expect the central bank to keep its benchmark rate at a record-low 0.25 percent on Sept. 14, and that only policy makers Ian McCafferty and Michael Saunders will vote for an increase.

“While there is zero chance of any policy action at this meeting, the thrust of the minutes and the vote could yet spring some surprises,” said Alan Clarke, an economist at Scotiabank. Recent news “has been mildly hawk-friendly,” he said.

Barclays also expects the MPC to shift language because of sterling’s recent depreciation and “step up hawkish rhetoric.” A more blunt reference to the currency would see BOE Governor Mark Carney following his European Central Bank counterpart Mario Draghi, who voiced concern this week about the euro’s volatility.

While the pound has rallied since the start of September, it’s still down more than 2 percent since the BOE’s Aug. 3 policy decision on a trade-weighted basis. Against the euro, it’s dropped 5 percent in the past three months and is near the weakest since 2009.

Figures due before the BOE decision next week are likely to show that inflation accelerated to 2.8 percent in August from 2.6 percent, moving further above the bank’s 2 percent target. Wage growth may have accelerated for a third month in July to just more than 2 percent, with unemployment staying at 4.4 percent, below the BOE’s equilibrium rate.

But limiting any hawkish shift is the fact the economy expanded just 0.3 percent in the second quarter, leaving growth the slowest among Group of Seven nations. A measure of services, the biggest part of the economy, has weakened, and the industrial part of the economy had a mixed start to the third quarter.

There’s also the fact that risks from the U.K.’s exit from the European Union continue to loom. BOE Governor Mark Carney said after the August decision that the outcome of Brexit negotiations is the most important factor determining the economy’s fate. The bank cut its economic growth forecasts the same day.

Michael Saunders said last week that the possible pitfalls related to Brexit aren’t reason enough to hold off raising interest rates. According to Paul Hollingsworth, an economist at Capital Economics, there’s an “outside chance” that BOE Chief Economist Andy Haldane joins Saunders and McCafferty in voting for a rate increase. Haldane said in June that a tightening in policy may soon be necessary.

The meeting will mark the first vote for Dave Ramsden, who took up his post as Deputy Governor for Markets and Banking this month. He replaced Charlotte Hogg, whose resignation after mere weeks in the job earlier this year left the post vacant for a time.
Source: Bloomberg