Interest Rate Uncertainty and the MPC’s New Member Greg Readings

The job of central bankers is arguably more difficult now than it has been for quite some time, as around the globe they attempt to deal with high inflation and an incredibly uncertain economic and geopolitical outlook.

In the UK this has been reflected in the last couple of Monetary Policy Committee (MPC) decisions, where voting has been split between a majority preferring 0.25% increases in Bank Rate and three pushing for larger 0.5% moves. Indeed, it was only in May that a couple of committee members hinted that rates might not need to rise any further, which obviously didn’t hold true come June.

The parting line of June’s MPC minutes, that if inflationary pressures become more persistent than currently assumed then the MPC “…would if necessary act forcefully in response” ramped up bets in financial markets that 0.5% increases in Bank Rate will follow at the next few MPC meetings. The probability being implied for this course of action has since started to scale back slightly as concerns around economic growth begin to bite and policymakers let their current thinking be known.

One such example is that of soon-to-be-policymaker Dr Swati Dhingra, who was grilled by the Parliamentary Treasury Select Committee on Wednesday ahead of her appointment to the MPC in August. Dhingra will replace Michael Saunders as an external member of the MPC for a 3-year term. She is an Associate Professor at the London School of Economics with expertise in international economics, trade policy and industrial organisation, as well as an elected member of the Council of the Royal Economic Society, part of the Editorial Board of the Review of Economic Studies, an Associate Editor for the Journal of International Economics and a Research Fellow of the Centre for Economic Policy Research (amongst other things).

The views of a new committee member are always of interest, but particularly so now. Not just because of the uncertain outlook but because Saunders was one of the most hawkish members of the MPC and in the camp voting for 50bps rate hikes. Is the hawk going to be replaced with another? Well, that was essentially the first question asked at the hearing – would Dhingra have voted for a 0.25% or 0.5% rise if she was already on the committee? Her answer was in two parts; she probably would have voted for 50bps at the time of the meeting (16th June) but given the economic data published since then, particularly consumer confidence hitting a new low, in hindsight there is “room for a very gradual approach”, implying she’ll likely join the majority of the MPC in voting for 25bps rate rises.

A tight labour market and upward pressure on wages has been a key talking point of late, but Dhingra cast some doubt on the automatically hawkish interpretation of this data and indeed its usual certainty, noting weak correlations between jobs that have experienced wage growth and vacancies and that the kind of vacancies being created are of lower pay than before.

However, she did express concerns about the inflationary impact of the prices businesses are charging for their goods and services due to higher import costs, suggesting these are being passed on to consumers to maintain profit margins. This may mean she has one eye on the strength of sterling.

On the same day, Governor of the Bank of England Andrew Bailey spoke at a European Central Bank event, commenting with regards to the MPC having to ‘do more’ (i.e. bigger Bank Rate rises) that we “…shouldn't assume it’s the only thing on the table" at the next meeting in August. He also noted that it’s clear the UK economy is starting to slow.

Arlingclose’s central forecast for Bank Rate is a continued increase in 0.25% increments. While risks to the upside certainly remain, this week’s comments from central bankers lend some support to our view that the gradual approach from the MPC will continue. In her testimony to the Select Committee, Swati Dhingra emphasised that there is much nuance to be had in the current monetary policy debate. That’s not necessarily easy to communicate to markets and the wider public, and the uncertainty doesn’t seem likely to end any time soon.

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