MPC To Look Beyond Above Target Inflation

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

Since the February minutes revealed three members voting for an additional GBP25bn of asset purchases, speculations have surfaced about the majority of the MPC shifting towards restarting the QE programme at this meeting. Comments on a Bank Rate cut have also sparked a debate about the effectiveness of e.g. negative rates.

While acknowledging the existence of the case for more QE with the data coming out of the UK and the eurozone underlining a struggle in the recovery, we do not see the majority of the MPC shifting at this meeting. Nor do we think a Bank Rate cut is the most likely policy change; the risks with the current aggressive pricing of the SONIA curve are skewed for the curve to steepen.

MPC will look beyond above-target inflation
Since July 2012, MPC policies have been unchanged with the last gilt bought in the Asset Purchase Facility (APF) in November. Together with the publication of the unchanged policy decision at the last meeting, the MPC sent out a statement communicating its view of the appropriate policy response, which can be narrowed down to two points:

1. The MPC thinks it is appropriate to look through the temporary, albeit protracted, period of above-target inflation. The forecasts from the Inflation Report show that the CPI is likely to stay above target until Q4 15.

2. The MPC stands ready to provide additional monetary stimulus if warranted by the outlook for growth and inflation.

The latter point has been a mantra for most of the second half of 2012, but the newest MPC forecast of inflation above target until Q4 15, has forced the MPC to take a stand on whether it would attempt to bring inflation back sooner by removing the current policy stimulus faster than markets anticipate. It has clearly chosen not to.

February Minutes surprised with Governor Mervyn King as a minority voter
While the unchanged policy decisions at the last MPC meeting were widely expected, it came as a surprise that three members voted for an additional GBP25bn of asset purchases. Governor Mervyn King and Executive Director Paul Fisher both joined Prof. David Miles in preferring to increase the size of the APF. David Miles has been a proponent for increasing the APF since November 2012, and has been a minority voter for four meetings now.

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