The Bank of England. Picture: REUTERS
The Bank of England. Picture: REUTERS

London — Bank of England (BoE) officials may be increasingly diverging on the prospects for Britain’s post-Covid economy, but that disagreement hasn’t yet become a schism on how to respond.

A widening split over the speed of the recovery from the country’s worst growth shock in living memory looks unlikely to prompt much of a debate over the monetary-policy response for now. That is despite chief economist Andy Haldane’s dissenting vote against expanding bond purchases in June.

The sense of alignment is very different to the 2008 global financial crisis, when officials led by then-governor Mervyn King clashed robustly on the economic outlook and the response to it, even casting simultaneous votes to raise and cut interest rates. As the turmoil deepened, the disagreement played out in a public spat that left the institution bruised.

By contrast, relative unity on the monetary policy committee this time round may provide more certainty to investors that officials are ready to keep stimulus taps running for as long the economy needs it. By helping to drive down bond yields, the BOE’s actions are also reassuring for the government, which has ramped up borrowing to fund emergency spending.

“There seems to be a division between different members on how the recovery is progressing,” Nomura International economist George Buckley said. “But I suspect there is probably not going to be much division when it comes to the next vote.”

Under governor Andrew Bailey, the BOE is already buying an additional £300bn of bonds as part of its emergency virus response, and economists expect it to top that up by £50bn more before year’s end.

Forecaster disagreement

Policymakers are expected to stand pat on interest rates and asset purchases when they announce their next decision on August 6. More interesting will be the bank’s updated outlook for the economy that may offer clues on the likelihood of further stimulus.

Some disagreement among MPC members is inevitable, given they are dealing with historically elevated levels of uncertainty. One gauge tracked by economists at the BOE — forecaster disagreement — surged almost 2,000% from January to its peak.

But the variations are nuanced, focused on what time horizon to gauge the economy’s prospects.

The focus will be on the central bank’s projections where we expect the recovery to look less ‘V-shaped’ than in May
Dan Hanson, senior economist

Haldane has emphasised high-frequency data such as payment transactions and Google searches, which he says are broadly corroborated by official GDP figures. He describes the recovery as “so far, so V”.

His colleague Silvana Tenreyro has focused more on risks slightly further out. She’s touted the idea of an “interrupted or incomplete ‘V-shaped’ trajectory,” distorted by risk aversion and restrictions on economic activity, as well as joblessness.

Bailey has played down suggestions that the rebound is looking robust, saying it depends on factors that are difficult to foresee such as how quickly people return to work, how shops and restaurants cope, and the extent of permanent economic damage.

“The focus will be on the central bank’s projections where we expect the recovery to look less ‘V-shaped’ than in May. Attention will also be on whether policymakers drop any hints that interest rates may go lower,” said Dan Hanson, senior UK Bloomberg economist.

Much is still unclear given the lack of a vaccine and flare-ups of the virus that have put some parts of the country back into partial lockdown.

Dissenting votes have been relatively rare in recent years, leading some critics to suggest it’s have fallen victim to “groupthink”. Since former governor Mark Carney took control in 2013, less than 40% of meetings had votes against consensus. That compares with more than six in 10 during the tenure of his predecessor Mervyn King.

“Haldane has acknowledged that risks are two sided, but ultimately tilted to the downside,” said Sanjay Raja, an economist at Deutsche Bank. “The August meetings could break the silence on policy direction, one way or another. My best guess is that if we get something exciting, it’s likely to be tilted to the dovish end of the spectrum.”

Regardless, Raja said, there will be some time “before we get any tangible policy moves via more QE or a rate cut”.

Almost all BOE officials have flagged the danger of a jump in unemployment, a particular concern as unprecedented government support starts to unwind from this month.

While the furlough programme covering 9.5-million jobs has helped keep jobless figures stable, it’s also delaying and clouding what the ultimate hit to the labour market will be.

“We’ve got this issue of whether it’s going to be a V or not, which is obviously the debate between Haldane and Tenreyro,” said Nomura’s Buckley. “It’s just an issue of if the recovery continues.”


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