June 19, 2017

UK MPC almost reacts to above-expected inflation

by Fathom Consulting

Last month we argued that, with inflation set to exceed the UK Monetary Policy Committee’s forecast, members’ resolve to keep policy on hold would soon be tested. We were right. Even with the consumer, the key driver of UK economic growth, under assault from above-target inflation and weak wage growth, three out of eight members voted for a rate hike at last week’s meeting. This is the highest number of votes in favour of a rate rise since May 2011. Nevertheless, past experience suggests that a majority is unlikely to form behind them.

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Indeed, our analysis of voting patterns found that of 40 periods of dissent since the Bank of England’s inception in 1997, only a little more than half of the time did the majority eventually form behind the dissenter(s). In the case of voting for a rise in Bank Rate, the ‘success’ rate of the dissenter was just 40%. In other words, more often than not, the dissenter(s) either gave in or left the Committee.

Having extended this analysis to the US Federal Reserve’s FOMC, we find that there is even less information in dissenting votes there — in the most important central bank in the world. Indeed, over the same period, there have been 26 instances of dissent, in which dissenters have been ‘successful’ just 15% of the time. It is perhaps ironic that what should be the strongest signal for future monetary policy, the voting of decision-making committees, carries little or no significant information about the next move.

With all this in mind, we would not rule out a reversal of the unnecessary, and quite probably ineffective, post-Brexit cut in UK interest rates before the end of this year. But with economic growth set to soften, we would not view any such move as a step on the road to policy normalisation, despite the more hawkish tone of this month’s MPC meeting.

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