How long can the dovish Governor keep hawks at bay?
WHAT comes first: Brexit or a Bank of England rate rise? If financial markets are a guide — not always the case — the UK will be saying auf wiedersehen to the European Union before there’s a majorit y among Threadneedle Street’s nine policymakers to raise rates. B-Day is March 29, 2019. But the first hike since July 2007 isn’t fully priced in until the second quarter of that year. In fact traders don’t even think it’s a coin-flip decision until early 2018.
As Governor Mark Carney put it at the Mansion House, things are looking choppy thanks to Brexit, a consumer crunch and weak wage growth. Don’t even mention the politics. The Canadian will be watching these factors “in the coming months”, thereby alluding that he’s not for turning in the immediate future. At first blush, that puts the Mon- etary Policy Committee’s three hawks — external members Kristin Forbes, Michael Saunders and Ian McCafferty — back in their nest. Forbes has made her last vote in any case, returning to academia at the end of the month.
But the rate-rise caucus has gained an unexpected ally in the Bank’s flipflopping chief economist Andy Haldane, formerly of the doves’ coop. He now says a “tightening is likely to be needed well ahead of current market expectations”.
He’s talking about unwinding some of the stimulus added in the aftermath of the referendum in the second half of this year, “provided the data are still on track” — an important caveat. His intervention did nearly as much to strengthen the pound as Carney did to weaken it.
Haldane’s volte-face makes three potential votes for a rise on the MPC, but whether the hawks can muster a majority looks doubtful. Aside from Carney himself, new member Silvana Tenreyro, an LSE professor concerned about the impact of Brexit, feels dovish. So too Gertjan Vlieghe. That leaves deputy governors Ben Broadbent and Sir Jon Cunliffe, who are both yet to emerge from the election period of MPC purdah, as well as the replacement for another deputy governor, Minouche Shafik.
Their comments will be treated with even more attention than usual in the weeks ahead yet the Bank’s internal policymakers tend to cleave more closely to the status quo than externals. That probably argues against a dramatic August move to tighten rates. Besides, why is the Bank getting all antsy now? It had its chance to take the first baby steps towards policy normalisation a couple of years ago, and it missed it.
First there was a general election, then there was a referendum on the way, as well as oil price-induced zero inflation for a while. The time was never quite right. If we couldn’t raise
AMONG the hawks, Forbes is worried that the UK’s domestically-generated inflation is on the rise beyond sterling’s Brexit devaluation, even though the Bank’s latest inflation report says most measures of domestic inflation, such as services inflation and labour costs, “have been fairly steady”.
The trio might well be saying “we told you so” in a year’s time if wages shoot up, requiring rate hikes at a faster pace than the “limited and gradual” tick preferred by the Bank. But for now, at the very start of these Brexit talks, Carney’s right. Hiking feels like a gamble. @russ_lynch