ULATION of a three-way split among the Bank of England’s Monetary Policy Committee (MPC) has intensified in recent days, creating a debate among City economists about whether the Bank will loosen policy even further.
External MPC member Adam Posen last week put the cat among the already nervous pigeons when he argued strongly in favour of further quantitative easing (QE) if Britain is to avoid a Japan-style stagnation.
Although Posen said his vote should not be seen as a foregone conclusion, the likelihood of a three-way split has grown, with Andrew Sentance remaining the hawk. Three-way splits are relatively rare – the last time was in July and August of 2008. Since central bank independence in 1997 there have only been three other occurrences of a three-way split.
Recent economic data has proved disappointing. On Friday, the September manufacturing purchasing managers’ index (PMI) showed a slowdown while public spending cuts are expected to curb activity and economic growth.
However, the MPC is faced with persistently-high inflation, which will be stoked by rising food prices and the Janaury VAT hike. Sentance argues that the MPC risks losing its inflation-fighting credibiliy if no action is taken.
But economists doubt that either Posen or Sentance will sway the MPC this month: “With long-term inflation expectations roughly stable, Sentance’s worries over lost MPC credibility lack immediate bite. At the same time, Posen’s case – that the UK is like Japan – is weakened by the marked pick up in nominal GDP and ongoing stimulus from the low pound,” said Citi’s Michael Saunders.
November is seen as a likely month for the Bank to move. Until then, committee members’ speeches and interviews will be scrutinised for hawkish or dovish tones.