With analysts anticipating that the vote at the Bank of England Monetary Policy Committee’s July 9 and 10 will be another nine-to-zero in favour of no change, the focus will be on the debate in Wednesday’s minutes and whether any member saw a stronger case for a hike.
MPC voting history shows that, in the absence of shocks, the committee is markedly more likely to alter policy in Quarterly Inflation Report months and the first dissenting votes in favour of a change can come as late as only one month before the actual move. With analysts divided over whether the first hike will come in November this year or February next, it still looks too early for a vote in favour of a hike.
When policy was changed in November 2003 and May 2004, both Quarterly Inflation Report months, the first dissenting vote in favour of change came the month before. Before the August 2004 change there were no dissenters before policy shifted, and before the August 2005 cut two members voted to lower Bank Rate in June and four in July.
Voting patterns when the financial crisis kicked in where distorted by the scale of that external shock, and only now is normality returning.
Alan Clarke, analyst at Scotia, notes that in the history of the MPC before a move the longest time lag from the first dissent was six months and in the shortest cases there was no dissent at all. The average lag between the first dissent and a change is three months.
In light of that, market participants may well attach a lower chance to a rate hike in 2014 if there is no dissenting vote at the August meeting, when the MPC will know the key forecasts underpinning that month’s Quarterly Inflation Report.
If Wednesday’s minutes do reveal the widely anticipated unanimous vote in July, that in itself is likely to have little, if any, impact.
One hot topic is whether some members now believe that the Bank’s central estimate of the output gap, at 1 to 1.5%, which was reaffirmed in the May Quarterly Inflation Report is too high.
“I think the next time those estimates are made they will probably be lower because we have seen that output and employment have improved far better than we had expected,” incoming Deputy Governor Nemat “Minouche” Shafik said at her confirmation hearing.
Shafik is new to the Bank, and was not speaking for the committee as a whole at her confirmation hearing.
Any reassessment of economic slack, however, can wait until the August forecast round and the latest economic data have suggested the economy may be evolving broadly in line with the Bank’s May projections.
While earnings growth has been surprisingly weak, the MPC is still likely to expect it to pick-up as the year progress, and a repeat of the line in the June minutes suggesting that the Bank’s May forecasts are still holding good is plausible.
The June MPC minutes said “Overall, there had been little news on the month to change the view encompassed in the May Inflation Report central projections that, under market interest rate expectations, the economy remained on course to meet the MPC’s aim of absorbing spare capacity over the next two to three years, while keeping inflation close to the 2% target.”
The July minutes will be published at 0830 GMT on Wednesday.