BoE’s Haldane moves the needle on UK rates.
BoE’s Haldane moves the needle on UK rates.
The chances of a UK rate hike have been given a boost by one of the key members of the four current internal bank members of the eight member MPC, Chief Economist Andrew Haldane, calling for a hike “relatively soon”. Haldane had been considered one of the most dovish, and thus these comments carry significant weight.
Haldane is one of the current 4 internal members that tend to vote as a group. If he is now leaning towards a hike, it suggests an internal debate is evolving.
Normally there are nine members of the MPC (five internal members). There are eight after the forced resignation of Charlotte Hogg, former Deputy Governor of the BoE, for not disclosing that her brother was employed in the banking industry (Barclays).
Notably, the views of Haldane appear to differ from that of Governor Mark Carney, who said a day earlier that, “now is not the time to begin that adjustment.” He said, “In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to prospects of tighter financial conditions and the reality of Brexit negotiations.” This sounded like little enthusiasm for moving rates for at least several months, and an implied risk that events are more likely to unfold towards no hike for some time.
The most hawkish member of the MPC, Kristen Forbes, will leave the MPC before the next MPC meeting. She will be replaced by Silvana Tenreyro. Tenreyro is known as a critic of Brexit. She appears to be on the pessimistic side in assessing the impact of Brexit, and thus may seem less inclined to hike rates. However, as a new comer, it is unclear how she will vote.
There is still no replacement for the vacant internal member position left by the resignation of Hogg, Presumably Governor Carney would have a deciding vote in the event of a 4-4 tie. But more likely is that, if a policy change were to occur, the 4 internal members would debate and come to this conclusion ahead of the meeting, and vote as a group.
At the MPC last week, Forbes was joined by Saunders and McCafferty (3 of 8 members; 3 of the 4 external members) to call for a hike.
The other external member Vlieghe, is seen as a dove. He was a lone dissenter calling for a cut in July last year, one meeting before policy was eased in August (via both a rate cut and QE).
Haldane has not previously called for a hike in his time on the MPC since 2011. Like others in the 4 (normally 5) group of internal members they tend to vote as a block, with the Governor.
It is perhaps more important for the direction of policy to assess which way the internal member debate is going; although presumably the internal members are influenced by the external members. At least 2 of the four external members are now essentially calling for a hike, one is not, and one has just joined and is yet to show her hand.
Those calling for a hike, including Haldane that is now leaning that way, say it is warranted mainly because it is removing only some of the policy easing implemented in August last year. The BoE June policy statement said, “All members agreed that any increase in Bank Rate would be at a gradual pace and to a limited extent.”
Haldane said, “a partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon, provided the data come in broadly as expected in the period ahead. Certainly, I think such a tightening is likely to be needed well ahead of current market expectations.”
His reasons for not calling for a hike in June were: “few signs of higher wage growth”, “despite robust surveys, there is still some chance of a sharper than expected slowing in the economy”, and the election has “thrown up a dust-cloud of uncertainty”.
These reasons indicate that he may yet decide not to raise rates later this year. It is quite possible that the negative effects of Brexit are just now beginning to manifest in the economy, and his optimistic views on growth will falter. Political uncertainty and a weak hand in Brexit negotiations may undermine confidence. Wage growth has in fact slowed recently.
Haldane’s more optimistic view on the economy are based mainly in stronger global growth boosting export and business investment prospects. He also notes higher global inflation expectations from nine months ago. However, inflation expectations have retreated in recent months, and oil prices have fallen to lows for the year.
It is unclear if Haldane would advocate a hike as soon as the next MPC on 3 August, which coincides with a quarterly Inflation Report, or one of the other 4 meetings later this year. The next best time might be the 2 November date when the final Inflation Report for the year is released.
The fact that Haldane notes that a hike would only remove around a quarter of the effective easing implemented in August last year (implying that the QE is the other three-quarters), suggests it would not take much sign of economic resilience to vote for a hike in August.
But given that Brexit and political uncertainty may take longer to be resolved, it equally would not take much deterioration in economic surveys and activity to keep him in wait and see mode.
Judging by the comments, although much briefer, by Carney on Tuesday, he is inclined to wait towards the end of the year before seriously considering a policy change, and at this stage has a more pessimistic outlook. The sarcasm when he said , “Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption” speaks to his frame of mind.
The probability of a hike on 3 August was close to zero ahead of the 15 June MPC meeting. It rose to 11% after the surprising 5-3 split vote. It fell back close to zero after the 20 June Carney speech, and has risen to 16% after the Haldane speech today. The odds are still low but significant. A full 25bp of hikes is still not priced in over the year ahead. A hike is 38% priced in for the 2 November meeting.
Nevertheless, the market is now seeing rates more clearly higher since the higher than expected CPI inflation result on 13 June and BoE meeting on 15 June. 2yr GBP swap rate rose from a low of 0.447bp on 14 June (in part induced by the low US CPI data) to 0.576bp (+12bp), up 7 bp today after the Haldane speech.
While the rate spread against the GBP/USD has narrowed in the last week, the political risk has increased, and real interest rates may not have increased for the UK, given any moves to raise rates by and large is a response to higher inflation data, not improved economic performance.