What to expect from the Bank of England – Hawkish dissenters?

The Bank of England’s Monetary Policy Committee will announce its latest decisions on monetary policy on Thursday. The central bank is not expected to make any changes to policy at this juncture, maintaining the Bank Rate at 0.1% and the QE total at £875 billion.

Vote split
The MPC is currently down to just eight members after the chief economist Andy Haldane left after the last meeting. Haldane was one of the more hawkish members, previously voting to reduce the stock of asset purchases by £50 billion.

However, with Haldane gone, its up to others to step up to the plate and the two most likely candidates for a hawkish surprise are Dave Ramsden and Michael Saunders.

Deputy Governor Ramsden previously said he could envisage the conditions for tightening being met somewhat sooner than previously expected.

Saunders, who is an external member of the MPC said it may be appropriate “fairly soon” to withdraw some of the current monthly stimulus in order to return inflation to target sustainably.

It is not clear whether the two members will follow Haldane’s lead but if any members are to vote to reduce the stock of asset purchases, Saunders and Ramsden are the two most likely candidates.

It is unlikely that any members will vote to change interest rates.

QE programme
The Bank of England’s QE programme runs slightly different to some other major nations. The asset purchases are not ‘open-ended’, and the central bank is scheduled to finish buying bonds by the end of the year.

Therefore, the discussion about reducing stimulus isn’t about slowing purchases and setting an end date but rather about lowering the total amount of assets available to be purchased.

Economic Projections
Expectations are for the central bank to lift their forecast for peak inflation in 2021.

“The latest economic projections in the Monetary Policy Report (MPR) are likely to show a much higher peak in inflation relative to the May MPR, with annual CPI inflation likely to be forecast well above the 3% mark later this year,” writes Lloyds (LON:LLOY) Bank in an emailed note.

“However, as it will probably still be assumed that the rise is ‘transitory’, the medium-term projections are likely to be little changed with inflation seen easing back down to be at, or close to, the 2% target in 2-3 years’ time.”

Rate hike timing
The Bank of England is not expected to signal any imminent hike in interest rates but with QE expected to end by the end of the year, an interest rate hike in 2022 could be on the table.

“As we expect a strong economic recovery with high employment growth and inflation will remain close to 2% also in H2 22, we expect the Bank of England to turn gradually more hawkish and hike the Bank Rate by 15bp in H2 22,” said Danske Bank analysts in a research note.