The Bank of England’s monetary policy committee (MPC) will wrap up its monthly meeting Thursday morning.
Back in March, George Osborne, announced that the MPC should consider the use of forward guidance. Mark Carney’s appointment as Bank of England Governor was just further evidence that more members of the MPC would be convinced to introduce forward guidance.
In the July MPC statement we received a strong hint that some form of guidance would be introduced in August. Societe Generale’s Brian Hilliard points us to the key passage:
“At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
“The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.”
The MPC will discuss three policies at the meeting 1. Level of interest rates 2. Size of the quantitative easing program. 3. The possible introduction of forward guidance.
While a change in any of these policies should be announced when the meeting concludes, Hilliard thinks the announcements on forward guidance are more likely to come during the August 7 inflation report, since Chancellor Osborne specifically requested it so. So tomorrow we’re likely to only get statements on interest rates and QE.
So what should the market expect on Thursday?
- Rate cut – Hilliard argues that while a rate cut is a consideration if forward guidance is introduced during the August 7 inflation report, Carney is unlikely to be able to convince the MPC to deliver on that so soon. He expects Bank Rate to hold steady at 0.5%.
- QE – Asset purchases are also expected to hold steady at £375 billion. Even if dovish MPC members Paul Fisher and David Miles that have voted for more QE in the past, the committee voted 9-0 for interest rates and QE to stay the same. So it would be odd to see them reverse and vote in favour of more QE.
- A reminder that any announcement on the implementation of forward guidance will be made with the inflation report.
Hilliard writes that when an announcement on forward guidance does come, it will be “state-contingent” guidance.
“The fact that the Chancellor’s request was framed in terms of assessing the merits of using intermediate thresholds being reached for some particular economic indicator points to the “state-contingent” approach being favoured by the MPC.”
The consensus is that unemployment rate or nominal GDP growth are the top contenders for the choice of the threshold.
Of course some economists have argued that the UK economy is already near escape velocity and more stimulus isn’t necessary. While this could complicate discussions on the necessity of forward guidance, the thinking is nobody wants credit conditions to tighten too quickly, and forward guidance could help in that regard.