New MPC Remit Won't Change Policy

We expect the Bank of England (BoE) to remain on hold at Thursday’s Monetary Policy Committee (MPC) meeting (13:00 CET).

On an aggregate level, not much has changed in the outlook for the recovery of UK output with little news in the macroeconomic data. The January numbers for industrial activity were significantly weaker than expected, declining 1.2% m/m, while the Index of Services, on the other hand, increased by 0.8%.The March manufacturing PMI confirmed the weak February reading at 48.3, but given the strength in the much more crucial service PMI in February, we have to wait for the updated reading on Thursday to draw any firmer conclusions.

The latest minutes were slightly more hawkish than expected with the signals of a concern over the depreciation of Sterling. The MPC restated its view of looking through a temporary above-target inflation -- also the inflationary consequences generated from the recent movements in the exchange rate insofar as those movements reflected real factors, but prospective movements in the exchange rate that reflected perceptions that monetary policy would remain excessively loose, or that the MPC’s commitment to meeting the inflation target in the medium term was diminished, would be a different matter.

Altogether, the minutes did not alter the present stance within the MPC. Governor King was once again in the minority, as the MPC voted 6-3 in maintaining the present policy.

We do not think the remit change (see details in Box 1 on next page) will affect policy or communication at this meeting. Note that no members have yet made any comments since the publication of the amended remit. Given that the MPC operates under ‘one man -- one vote’, any policy choice that requires co-ordination (e.g. a commitment to specified policy path or intermediate thresholds) probably requires some sort of prior arrangement within the MPC. We see that this is most likely to happen after the arrival of incoming governor Mark Carney.

With concerns on Sterling movements and the MPC not yet internally aligned on the amended remit, we do not expect the MPC to change its stance at this meeting. The case for further asset purchases is still present but we would look to the May meeting (when new forecasts from the Inflation Report will be available) or even more likely the August meeting (with both Mark Carney in the chair and the discussions of the effectiveness of forward guidance in place) for possible increases to the asset purchase programme (APF).

A more probable change could come in the setup of FLS targeted at small and medium-sized companies (SMEs) as proclaimed in Chancellor Osborne’s budget speech two weeks ago.

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