Watching the Bank of England is an exercise in what old Cold War hands used to call Kremlinology. Because Moscow never used to make open statements about its plans, the only way to get a sense of its future actions was to watch the smoke signals coming from the Kremlin, to look at the body language rather than the actions.
When it comes to the Bank of England, the best way to get a sense of its future actions is to run a fine toothcomb over the Monetary Policy Committee’s members’ comments to see which way they’re leaning. And it so happens there has been a subtle shift over the past few months – a shift most economists seem to have missed.
Remember that only a few months ago the Bank’s Governor declared that the next move in interest rates would be up, not down, and that all members of the MPC agreed on that. Then, in February’s Treasury Committee hearing, he subtly changed his position.
Now have a look at these two sentences, the first from the February MPC minutes:
The MPC judges it more likely than not that Bank Rate will need to increase over the forecast period to ensure inflation remains likely to return to the target in a sustainable fashion.
Now compare that with this one from the March minutes (emphasis mine):
The MPC’s best collective judgement is that it is more likely than not that Bank Rate will need to increase over the forecast period to ensure inflation returns to the target in a sustainable fashion.
In other words, the MPC is no longer unanimous that rates will go up over the forecast horizon.
To some extent, this is just a formalisation of what markets are already telling us. Not long ago they (and the Bank) were predicting rates were going up within months. Now they don’t expect an increase in borrowing costs at all, at least until 2021(!) Indeed, they think there is more chance of a cut than an increase.
My understanding is that at least two of the MPC members are strongly considering cutting rates, if wages and inflation do not pick up considerably in the coming months (a look through the cuts and it won’t take you long to guess which ones).
Smoke signals like this don’t seem to have been noticed very widely in markets, and yet the reality is that the MPC is closer than many think to being split on interest rates, with some members voting for a cut, rather than a rise.
All the same, there is a difference between considering a cut and actually doing it (a distinction which seems to have been lost on some day traders who got very excited when I tweeted words to that effect earlier today – and then very angry when the MPC did nothing). The latest minutes (which, significantly, repeat that latter line) hint that until the referendum is out of the way, the Committee is unlikely to do anything to rock the boat.
But if the economy has not shown convincing signs of pick-up by July, the smoke signals from Threadneedle Street suggest that some members are poised to vote for a cut in rates.