More of the Bank of England (BoE) rate-setters saw in July their policy decision between raising the base rate and keeping it unchanged becoming more finely balanced, July's Monetary Policy Committee (MPC) minutes revealed on Wednesday. This is a notable shift from the previous several MPC minutes, which showed the policy decision was finely balanced for only two members.
This, combined with the most recent hawkish statements by the BoE's top policymakers, reinforces the suggestion that the BoE eventually stands ready to begin to normalize monetary policy sooner rather than later.
But the fact is that there have already been moments in recent years when the Bank signaled similar hawkish positions, but with action often suppressed by weaker macro data, economic uncertainty, or for example, sharply falling inflation following last year's sudden plunge in oil prices. Therefore, whatever the current rhetoric coming out of the chambers of the Old Lady, much more will depend on the macro data in the coming months.
July's MPC minutes revealed that for some members, the medium-term inflation outlook relative to the 2% target was "becoming more skewed to the upside at the current level of the Bank Rate." It also showed that the July's decision on the policy stance was heavily influenced by the Greek crisis, which was culminating at the time of the MPC meeting earlier July.
But the Greek crisis is over, at least for now, after the July 13 agreement reached in Brussels offered a cautious relief. So this risk has dissipated somewhat.
But the July logs also showed the policymakers have become more concerned about a stronger pound. The rate-setters judged that "the recent appreciation of sterling would be expected to have a direct effect on inflation, bearing down on the CPI relative to the outlook described in the Committee’s May forecast, although the speed and degree of pass-through from movements in sterling was uncertain.”
This downward pressure from exchange rate moves, if more persistent and deeper, could either delay the rate hike, or simply make the subsequent movements in the base rate notably slower, or even cause a reverse.
However, BoE Governor Mark Carney said last week that sterling's exchange rate was not "the dominant factor in terms of outlook for inflation."
"We do not take a view on the level of exchange rate. There is no informal target level nor informal one, and one of the strength of the monetary policy framework in the UK has been not just inflation targeting, but a commitment, and a demonstrating commitment, to freely floating exchange rate," Carney said while testifying before the UK Treasury Select Committee.
Governor Carney also said "the point at which the interest rates may begin to rise is moving closer, given the performance of the economy, consistent growth above trend, affirmative domestic costs, kind of balanced somewhat by disinflation that we are are importing from abroad in part due to the strength of the currency."
On domestic costs, the BoE policymakers judged in July that upward pressures were recovering, which could be viewed as another reinforcing factor supporting an earlier policy normalization cycle.
"There was a range of views among Committee members on the significance and scale of the news regarding domestic costs, external price pressures and the balance between them. It was evident that domestic costs were recovering. But there were questions regarding: whether the increase in wages relative to productivity would be sustained in the light of the risks to global and UK activity emanating from developments overseas," the July logs said.
Much will now depend on the incoming macro data. The wage growth and inflation figures will stand out and suggest the BoE's next moves.
As Carney said in his speech at Lincoln Cathedral last week,
"The MPC will have to feel its way as it goes, monitoring a wide range of indicators and adjusting the pace and degree of Bank Rate as it learns about the effects of higher interest rates on the economy."
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