LONDON (MNI) – The Bank of England’s Monetary Policy Committee will
stay out of the limelight until the dust from the May 6 election has
settled.
The MPC has pushed back the date of its May meeting from the
scheduled May 6 date until Monday, May 10 and, with committee almost
inevitably leaving policy on hold at that meeting, the next significant
public comments will only come along with the May 12 Inflation Report.
Past precedent as well as in-house guidelines suggest BOE
official should say little, if anything, during an election campaign to
avoid getting embroiled in any political tussles.
The April MPC meeting ended Thursday in an unchanged policy
decision and no statement, shedding no new light on MPC thinking. With
the MPC having effectively adopted a three monthly decision cycle –
aside from the launch of quantitative easing – all policy changes
since then have come in the quarterly Inflation Report months – even the
minutes of the April meeting may be a little bland.
The focus is now on May, and the outturn of the election.
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BOE MPC members have steered clear of saying anything controversial
on the implications of any electoral outcome. The line they have taken
is to stress UK lawmakers are all committed to deficit reduction,
“It is very clear that we have a political consensus on the need
for fiscal consolidation,” BOE Governor Meryvn King told the Treasury
Select Committee back in February.
He also told the committee that he, along with the credit
rating agencies, expected clarity on how the deficit would be
tackled after the election.
Electoral uncertainty, however, continues to cast a shadow over
policy making.
Back in November, the BOE sought to factor for the first time
in its Inflation Report the looming fiscal tightening. The BOE’s normal
convention, like other central banks, is to simply plug in the
Treasury’s fiscal projections into its model.
The BOE, however, adopted a quasi-Ricardian convention – assuming
that consumers will factor future fiscal tightening into current
behaviour.
“It’s quite plausible that private sector agents have already
decided that there’s likely to be some further fiscal consolidation …
So we have taken into account in our forecasts some impact of concerns
among households for what this might mean for disposable incomes in the
future,” King said.
One consequence of the BOE’s assumption is that if the expected
fiscal tightening does not materialize after the election, the MPC may
end up expecting consumption to be stronger than previously thought.
Opinion polls continue to suggest it is close call between the
opposition Conservative Party winning an overall parliamentary majority
and no party getting a workable majority.
In the latter case, the widespread assumption among political
pundits is that it will be difficult, given the combative nature of
British politics, for any coalition to form and agree upon further
substantial fiscal tightening.
If fiscal policy uncertainty persists after the election, Gilts
and sterling are likely to come under intense pressure and the credit
rating agencies have warned of the risk of a sovereign rating downgrade
should the parties fail to agree fiscal tightening beyond that
contained in the recent Budget.
Publicly MPC members have steered clear of the subject – sticking o
the everyone agrees on the need for fiscal consolidation line.
Economists, however, say that in practice the BOE would have little
choice but to adopt a more hawkish line in the event of a hung
parliament.
David Page, economist at Investec, says there would be shocks in
opposing directions – with rising gilt yields and credit rating
downgrades amounting to monetary tightening while falling sterling will
be stimulative, and inflationary.
“We think the BOE would be more immediately concerned with
sterling’s fall and its upward impact on inflation,” Page said.
Malcolm Barr, economist at JP Morgan, says the MPC’s instinct would
be “to err in the direction of early tightening.”
He says the committee would be worried about the spillover
from falling sterling and rising risk premia into rising inflation
perceptions. The MPC would look to be a point of stability by
reinforcing its commitment to price stability.
Barr, however, warns against attaching too much weight to the
fiscal uncertainty – what is happening to the real economy will continue
to be at the heart of decision making.
The latest data suggest the economic recovery is proceeding broadly
in line with the BOE’s predictions in the February inflation report.
In that report the BOE forecast CPI would average 3.33% in the
first quarter with GDP down just 0.06 on the year, implying quarterly
growth of around 0.7%.
CPI in January spiked to 3.5% in January before dropping to 3.0% in
February, entailing another 3.0% outturn would leave it at 3.2%, a shade
softer than the BOE expected.
First quarter GDP growth, impacted by an exceptionally cold
January, may also be somewhat softer than the BOE expected. The National
Institute of Economic and Social Research on Thursday estimated it at
0.4%, but said the underlying pace of growth, stripping out weather
effects, was most likely stronger than this.
With King repeatedly stressing the importance of not getting
obsessed with small differences in numerical outturns, and with the MPC
not attaching great weight to initial estimates, a first quarter GDP
reading of 0.4% or so will not cause much concern on the committee.
For the near-term at least it appears the BOE’s recovery
projections are holding good. It will likely be May, however, before we
hear King and his colleagues talking publicly about how things are
evolving.
–London newsroom: 4420 7634 1624; email: ukeditorial@marketnews.com
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