What to look for Thursday with the BoE
Views From the Marsh - David Owen
When it comes to the BoE this week, we have hopefully helped set the scene in previous recent Substack notes (see here and here).
By way of background, we made the call when the UK came out of furlough at the end of 2021 that the UK Bank Rate was going back over 5% - and that is what happened.
Concerns about another significant downturn proved wide of the mark, as many commentators - including the BoE - did not focus enough attention on the overall strength of household and corporate sector balance sheets.
Meanwhile, the economy adjusted relatively well to higher rates.
We have also long argued that this November’s MPC decision was the first real opportunity for the BoE to reframe discussion of UK monetary policy, looking out to 2025 and 2026.
This follows Rachel Reeves’ first Budget - the BoE has had more like 10 days to analyse all the changes, not the 10 weeks for the OBR - and some time after Clare Lombardelli was appointed Deputy Governor of Monetary Policy, charged with introducing changes recommended by the Ben Bernanke Review.
What to look for:
● Apart from another expected 25 basis point Bank Rate cut, how much does the new improved Monetary Policy Report (with scenario analysis), along with the BoE’s forward guidance, row back on expectations of further significant rate cuts?
● Was the vote split again?
● Does the BoE agree with the OBR that Budget changes - including an ongoing overrun in public spending, compared to the previous plans - will boost growth in the near term?
● And, does it agree with the OBR that the Budget will add 0.4 of a percentage point to inflation in 2025/26 and 0.3 of a percentage point to inflation in 2026/27, with the return of a positive output gap again, and GDP above potential?
● Does the BoE agree with the OBR that the increase in the NIC rate for employers and reduction in its threshold will ultimately mostly squeeze real wages, or like us, does it think the impact will be more seen across the piste, in combination with a significant rise in the National Living Wage, also push up prices?
● In fact, will the BoE discuss the rise in the National Living Wage at all? If history is any guide, the MPC may be surprisingly quiet on the subject.
● How much weight will the BoE put on £20bn additional public sector net investment a year, helping crowd in additional private sector investment - ultimately boosting productivity and trend growth?
● In fact, to the extent that the Treasury may believe it has introduced a fiscal policy and economic reset, will the BoE think it is appropriate to introduce a monetary policy reset in the UK?
We will be writing much more on this in a research note after Thursday’s decision.
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