MPC split points to uncertainty about rates

Louisa Bojesen
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THE rate setting arm of the Bank of England is officially divided. Monetary Policy Committee (MPC) member, Adam Posen, recommended last week that more stimulus be pumped into the economy to avoid a Japan-style lost decade. In stark contrast, hawk Andrew Sentance still argues that no further stimulus is needed… and then you have all the other MPC members somewhere in the middle.

Ian Harnett, a European Strategist from Absolute Strategy Research, says the split within the MPC highlights a deep uncertainty at the heart of monetary policy, and this is one of the things holding back the markets. According to Harnett, over the next three months, policymakers on both sides of the Atlantic will seek to create a greater certainty about the framework used to solve internal and external debate. If more of a definition on normalisation were to be introduced (what policy makers actually are looking for), then chances are it could accommodate views by both Sentance and Posen.

Harnett points out there seems to be a nominal GDP target (early last year, Bank of England (BoE) Deputy Governor Charlie Bean spoke about getting nominal GDP over five per cent), and an implicit unemployment target, but he thinks it’s apparent that the BoE isn’t looking at inflation at all at the moment. In other words, the BoE hasn’t recapitalised the capital markets to get bankers rich; it has done so to get people back to work.

For the remainder of the year, and once we get more clarity on monetary policy, Harnett thinks we’ll see the FTSE 100 taking on its April peaks of around 5,800. He says we’re still in an environment where you want to re-risk rather than de-risk, and he recommends maintaining a cyclical bias with industrials beating retail stocks, and banks beating pharmaceuticals.

Maurice Pomery, CEO of Strategic Alpha Limited, thinks the split at the BoE is similar to what is seen at other central banks, and says it is important for central banks to be much more global in their views.

Pomery says that Posen and BoE Governor Mervyn King are definitely aware of the global implications of the financial markets and that global considerations should be at the forefront of their thoughts when they look at where rates should be in this country.

Louisa Bojesen co-anchors European Closing Bell weekdays on CNBC.