November BoE MPC Preview: Another close vote for no change

Despite there being a clear MPC split on interest rates in September, further signs that inflation has probably peaked and, more generally, dismal real economy news have left forecasters seemingly fairly confident that the BoE will leave Bank Rate on hold this week. Last month, arch-dove, Swati Dhingra was joined by Governor Andrew Bailey, Deputy Governors Ben Broadbent, Jon Cunliffe and Dave Ramsden as well as Chief Economist Huw Pill in opting for no change. But their five votes were only just enough to outgun Jon Cunliffe, Megan Greene, Jonathan Haskel and Catherine Mann all of whom wanted another 25 basis point hike. The tightness of the 5-4 decision underlined a high level of policy uncertainty that inevitably increases the risk of a surprise tightening on Thursday. However, assuming that the consensus is correct, Bank Rate will stay at 5.25 percent, matching its highest level since December 2007.

However, no change in Bank Rate would not imply a steady overall policy stance as the ongoing QT programme will continue to shrink the bank’s balance sheet. In September, the MPC announced that over the 12 months beginning in October, asset sales would aim to reduce the stock of gilts held in the Asset Purchase Facility by £100 billion to £658 billion. This is a step-up from the £80 billion cut targeted in the 12-month period just ended but much the same after including the near-£20 billion of disposals delivered in 2022/23 to wind-up the QT’s corporate bond fund. As of late-October, combined asset sales stood at about £143 billion, implying a 16 percent decline in the stock of QT.

Financial markets were caught off guard by September’s neutral policy vote and duly trimmed their interest rate expectations. The peak to 3-month money rates is now put at about 5.30 percent in December, down from the 5.65 percent level discounted just before last month’s decision. The medium-term outlook is similarly less hawkish and rates at the end of 2024 are currently priced at just above 4.70 percent versus about 4.95 percent previously.

Inflation developments since the September meeting have been mixed. The annual headline CPI rate last month only held steady at its August level, although that at least matched the lowest since February. More hopefully though, the core rate dipped a tick to 6.1 percent, its weakest print since January. However, the MPC will be far from happy with current levels and will be all the more displeased with an uptick to 6.9 percent in the service sector, their main area of concern, where prices remain stubbornly sticky.

Wage growth similarly remains uncomfortably high in most of the main sectors. As of the three months to August, the annual rate for regular earnings in manufacturing matched its 8.0 percent record high while its services counterpart (also 8.0 percent) was just a couple of ticks short. So far, only construction has shown clear signs of slowing. Consequently, while some MPC members may be more hopeful that wage rises have peaked, others will be worried that there has not yet been a broader-based deceleration. With regard to the labour market more generally, the bank will have been less than impressed by latest update from the Office for National Statistics (ONS) which the issuer felt obliged to term as “adjusted experimental” due to problems with data response rates. Although in the main pointing to an overall cooling, doubts about the report’s accuracy can only complicate further what is already a highly uncertain economic outlook.

The economy grew in August but a 0.2 percent monthly rise only reversed a portion of a hefty 0.6 percent drop in July and left total output on course for a negative third quarter. Holiday-related distortions cloud the underlying profile but with the impact of earlier interest rate rises becoming increasingly apparent, GDP is struggling to keep its head above water. Retail sales fell in both July and September, implying a hit to third quarter GDP growth and leaving volumes at their lowest level since last December. Arguing against any near-term rebound, consumer confidence dropped sharply to a 3-month low in October while M4 lending shrank at an annualised 6.0 percent last quarter. According to the Halifax, the UK’s largest mortgage lender, house prices have fallen every month since March while the flash PMI survey found the decline in private sector demand accelerating in October. Hardly helping is international trade with total export volumes in August down more than 6 percent from their level at the end of 2022. Aggregate demand is clearly weak.

Still, surprises in the data have been quite evenly balanced since September’s discussions. Econoday’s relative performance index (RPI) averaged minus 6 over the period, indicating economic activity in general performing much as expected. That said, the real economy has fared rather less well (average RPI-P = minus 14) meaning that there has been something in the data for the doves and hawks alike.

So, once again, the November BoE MPC meeting will have to decide whether or not the economy is slowing fast enough to ensure that inflation will meet its target within an acceptable timeframe. A new Monetary Report (MPR) will provide updated economic forecasts but previous predictions have been revised by so much that the latest edition is unlikely to have much impact. Another split vote seems very probable, with the hawks worried by an inflation rate that is still more than three times the target level and the doves more concerned by the downturn in the real economy. In September, Bank Rate was only kept at 5.25 percent due to Governor Bailey’s casting vote – Thursday’s outcome could be just as close.