BoE Watch

2 min read
Divyang Shah

Once again the BoE minutes show two hawks voting for a hike outvoted by the seven doves wanting to keep rates on hold. The Sept minutes reveal that the key difference between the hawks and doves is on wage growth. The doves are unwilling to shift toward supporting a rate hike unless they see actual evidence of a pick-up in wage and income growth.

The argument that the hawks (Weale and McCafferty) make in supporting a rate hike is that survey evidence of a tightening labour market suggest a sharp pick-up in wage growth as slack was absorbed. This is a forward-looking view and an argument based on the fact that monetary policy operates with a lag. In their judgement a 25bp hike would leave policy extremely supportive and facilitate the banks aspiration that rate hikes should be gradual.

The doves are more risk-averse and unwilling to support a rate hike. They are concerned that hiking rates without a pickup in wage and income growth increased the vulnerability of highly indebted households. In addition to this they fear that premature tightening would leave the economy vulnerable to shocks at a time when the scope for stimulus was limited.

In the speech to the TUC last week Carney said that the BoE will watch pay settlements at the turn of the year and “take a steer” from growth in starting salaries from people starting a new job. The strength of this data is likely to provide a strong pointer for the doves to shift their position.

A rate hike this year remains a remote probability and while we are pencilling in a hike in Feb 2015, the risk is that this could be delayed beyond the UK elections in May 2015.