6 days ago
The Bank of England has rarely been this split over price pressures
The Bank of England in London. — Reuters
LONDON: Last week's interest-rate cut at the Bank of England (BoE) has been perhaps the most divisive yet under Andrew Bailey's governorship.
Splits over how to squeeze out stubbornly high inflation have been common in recent years.
However, last Thursday's vote saw the BoE's two most senior voices on monetary policy pitted against the governor – an eyebrow-raising divide at a crucial moment given inflation is predicted to hit 4% in September.
Deputy governor Clare Lombardelli joined chief economist Huw Pill in opposing the narrow five to four vote to cut interest rates by a quarter-point. Lombardelli's dissent was highly unusual – the first from a deputy governor for monetary policy since Bailey took the helm of the central bank in early 2020 – and exposed deep fractures over how to tackle a fresh resurgence in price pressures.
If the split persists, Bailey's vote alone will decide how quickly the BoE plows ahead with further easing.
'The bar for faster cuts has risen on the back of this and heightened divisions within the Monetary Policy Committee (MPC) may also call into question just how far the bank rate can go in the coming quarters,' said Sanjay Raja, chief British economist at Deutsche Bank. 'Internal disagreements are now boiling over.'
Deutsche Bank's measure of voting division on the MPC shows discord has soared in recent years, peaking in 2023 and remaining elevated as rates have fallen, particularly when compared to the harmony in the post-financial crisis era when rates were held at close to zero.
Bloomberg Economics' BoE Speak Index also shows a wedge emerging between Bailey and Lombardelli.
Using Bloomberg News headlines, it shows Bailey's recent remarks have been more dovish than the BoE average and notably more so than Pill and Lombardelli whose comments have been more neutral.
Last Thursday's meeting was the first ever that a second round of voting was needed to break the deadlock after no single course of action won a majority of MPC members.
The vote split – economists had expected only two to oppose a reduction – saw the market odds of a cut in November drop below 50% as the once-a-quarter pace seen since last August was thrust into doubt.
The divide reflects disagreements over whether the current spike in inflation will derail the BoE's progress in containing price pressures that first erupted after Russia's invasion of Ukraine sent energy prices soaring. But it also reveals Bailey's more relaxed approach to dissent.
'As the MPC approaches the end of its easing cycle, you'd expect there to be disagreement among policymakers about where rates should settle,' said Dan Hanson, chief British economist at Bloomberg Economics.
'What's unusual, at least when compared to the past decade or so, is there's a split right at the heart of the committee – between the governor and the deputy governor for monetary policy. The key point for investors is that Bailey's vote will likely tip the balance between a cut and hold.'
The BoE's latest projections showed inflation will be hotter than previously predicted after a jump in food bills.
While Bailey believes this resurgence is being driven by temporary factors, others on the committee fear it could spill over into more lasting 'second-round effects' on wages and prices.
When asked about her views in the press conference following last Thursday's decision, Lombardelli declined to detail why she had voted against the governor, promising to lay out her reasoning in future and continuing her guarded approach to public comments since being appointed last year.
However, she later pointed to the threat of food prices, which have 'a particularly salient role in inflation expectations'.
Historically the governor and the deputy governor for monetary policy have moved in lockstep.
Lombardelli's predecessor Ben Broadbent never dissented under Bailey or former governor Mark Carney.
It was also unusual under Carney's predecessor Mervyn King, though he at times disagreed with deputy governor for monetary policy Charlie Bean on the size of quantitative easing.
Bailey has been sanguine about the divisions exposed at recent meetings and is believed to encourage a culture of disagreement more than predecessors. He has frequently hailed the splits as evidence of a lack of 'groupthink' on the committee – an accusation that politicians have thrown at the central bank.
It leaves the governor in a powerful position. Bailey is likely to be the key swing voter deciding tight votes at crucial meetings later this year.
The November meeting will come just weeks after September's CPI release, which the BoE expects to show inflation at double the 2% target.
It may also follow another tax-raising budget from Chancellor of the Exchequer Rachel Reeves, a fresh challenge for rate-setters who are still grappling with the inflationary impact of the hike in payroll levies that hit employers in April. — Bloomberg
