Earlier today, the Bank of England released the minutes of the latest meeting of the Monetary Policy Committee.
Perhaps the most important thing to note is that there was one dissenter on forward guidance, Martin Weale, who disagreed with the time frame for one of the inflation knock-out conditions (more details here).
Rob Wood, chief UK economist at Berenberg Bank:
Central bank jawboning works only if investors believe the central bank means what it says, and today’s minutes will not increase confidence in Carney’s words from last week. Guidance should still help to keep short-rates low as the economy grows, helping the recovery, but markets seem to have been right to focus on the cautious nature of the guidance. We expect the first rate rise to come in 2016Q1.
One way of summarising the minutes is that Carney’s arrival at the BoE came a few months too late to get the MPC united behind him. With the economy showing signs of improvement and business surveys rising sharply, there appears to be plenty of disagreement about how dovish policy needs to be.
The potential for more mangling of communication in MPC member’s speeches over the next month or so now seems high, given the apparent disagreements. If, despite these minutes, the BoE do mean what they say and do not expect the first rate rise to come until late 2016, they will have to take actual action, either cutting interest rates or re-starting asset purchases. We expect neither though.
Vicky Redwood, chief UK economist at Capital Economics:
MPC member Martin Weale’s vote against the introduction of forward guidance will hardly help to reassure the markets about the strength of the MPC’s commitment to keep interest rates low….
[Weale’s disagreement with the time horizon] is a bit odd. After all, the MPC has previously kept policy loose despite expecting inflation to be above target at horizons beyond 24 months. What’s more, the MPC’s current inflation forecast shows inflation expected to be about 2.5% in a year’s time.
So if the knockout had been shortened, presumably forward guidance would have suggested that an interest rate rise was in the offing! Indeed, gilt yields rose further after the minutes were released, after steady increases yesterday.
Accordingly, the MPC may have to take further action to head off what it has termed the “unwarranted” rise in market rate expectations. Note that for a minority of the Committee (read Paul Fisher and David Miles) “the case for further monetary stimulus remained as compelling as in July” and they just wanted to gauge the impact of forward guidance before reconsidering a resumption of QE. Given the market reaction so far, they will presumably be voting for more QE as soon as next month and could possibly be joined by others.
Jeremy Cook, chief economist at World First:
Carney has missed out on getting a unanimous vote by one vote as Martin Weale decided that, while forward guidance is a plan he is happy with, the inflation caveat needed to be more short-termist, i.e. if pressures were seen sooner than the 18-24 months that we have eventually been given.
This is a nod to the Bank’s mandate as an inflation controller – not that it means much at the moment, given they have not been within driving distance of target for a long time.