Can a rest be as good as a change for the Bank of England?


The UK has had a good fortnight, by recent standards, despatching a minor bank meltdown with uncharacteristic aplomb and conducting an entire fiscal event without crashing financial markets. Howay!

Pending further global snafus, the final move in this dance will be next week’s monetary policy decision, which as been complicated by the recent “a bank run’s as good as a hike” dynamic that has infected rate expectations.

First of all, the good news: for the first time in ages, the public thinks the Bank is less crap at its jobs than they used to. Here’s the net satisfaction with the job Threadneedle Street is doing in using rates to control inflation, from the newly-released Bank of England/Ipsos Inflation Attitudes Survey:

Line chart of ‘Overall, how satisfied or dissatisfied are you with the way the Bank of England is doing its job to set interest rates in order to control inflation?’ showing Not liked, but disliked less

That will be small comfort going into a meeting where markets are (per Bloomberg’s WIRP screen, as of Friday morning) divided extremely cleanly on what’s coming, whether it’s a 25 bps hike or a pause:

(Just for the shot/chaser dynamic, here’s how that chart looked last Wednesday, before Silicon Valley Bank went all 💀:

As Garrosh Hellscream once memorably told Gul’dan, times change.)

Economists, for what it’s worth, still reckons a 25 bps increase is on the cards, by a ratio of roughly 3:1:

Whether even that’s 25 and done or 25 and more, is one of many mysteries surrounding Thursday’s announcement.

Citi’s Ben Nabarro has summed up the complex action vs words balance Andrew Bailey et al. will need to strike at a “tight call” meeting. He reckons “a skip, not a pause” is on the cards:

On balance, we think a hawkish hold is now more likely than a further hike. The MPC are likely signal the hiking cycle is not yet done. However, for next week, three factors we think suggest a more cautious approach. First, for a majority, communications from February suggest ‘risk management’ hikes are no longer seen as prudent without an intensification of inflationary risks. Subsequent wage and domestic services inflation have signaled a reduction in these inflationary challenges, rather than an escalation. And third, recent financial disruption is likely to effect monetary policy as a classical ‘Brainard uncertainty’ shock, engendering additional caution. For now, we think a final hike in May remains more likely than not, with the MPC then on hold. Although in the near term, uncertainty is likely to remain exceptionally high.

Royal Bank of Canada’s Cathal Kennedy, in the 25 bps camp, notes that the MPC’s voting dynamic is once again going to be weird (a point we touched on a couple of weeks ago). With our emphasis:

When combined with its assessment of the labour market, we would suggest that the MPC could point to sufficient evidence to pause its hiking cycle after this meeting. Indeed, even if we think it too early to do so, the question is likely to switch whether there are votes to cut rates on the MPC at the moment.

At both of the last two meetings there have been two votes, from Silvana Tenreyro and Dr. Swati Dhingra, to hold Bank Rate (see Exhibit 2). Dr. Dhingra has subsequently come out to say that “a prudent strategy would hold policy steady” i.e. stopping short of saying that rates were too high despite her dovish voting record since she joined the MPC in August.

Prof. Tenreyro on the other hand has been much more explicit in saying that rates are too high at present as she told the Treasury Committee in the wake of the February MPR (see above). Logic suggests therefore that she is close to voting for a rate cut.

Tenreyro only has only three meetings left before her MPC term expires in early July, however, so it’s questionable how significant that decision would be. It will be difficult for any potential replacement to be more dovish than her and the more likely scenario is that her departure tilts the overall balance of the MPC more hawkish.

So, Dhingra/Tenreyro for a pause, with Sir Jon Cunliffe possibly joining them (a view echoed by Deutsche’s Sanjay Raja), and then everyone else for 25 bps.

The wild card, of course, would then be Catherine Mann, who if anything seems to be getting more hawkish. As Société Générale’s Bríán Híllíárd (who reckons a 7-2 split for 25 bps) puts it:

The constant on the MPC is Catherine Mann who doggedly and regularly repeats her concerns that upside risks to inflation remain and it is better to get on top of them now. She said that “more needed to be done” and that the terminal rate was “beyond the forecast horizon” (that’s a very hawkish comment!) She shares the OBR view that a recession will be avoided and believes that the effectiveness of monetary policy has been reduced by the prevalence of fixed rate loans taken out during the pandemic.

In extremis, a three way (first since December) or worse split certainly looks possible (it’s unlikely to come up but here’s a reminder of what happens with even splits). NatWest’s Ross Walker (our emphasis):

We expect a 7-2 vote (Tenreyro & Dhingra dissenting in favour of no change), though a more dovish 1-5-2-1 splintering is perfectly possible (some combination of Mann voting for +50bp, Cunliffe voting for no change, Tenreyo voting for a 25bp cut).

The ECB appeared to pull off a 50 bps hike yesterday with respectable (ish) smoothness given the circumstances. We doubt markets would digest a four-way MPC split with quite so much happiness.