The Bank of England's Lone Hawk Clings to Rate-Increase Push

  • McCafferty voted for 25 basis-point tightening in January
  • Data next week on wages may hold key for his call next month

Ian McCafferty -- the only Bank of England official to vote for a rate increase in the past six months -- has a reason to watch next week’s wage data closely.

With concern about China, a weaker inflation outlook and a slump in oil prompting investors to push back bets to 2017 on the timing of the first tightening since the financial crisis, the arguments for lifting the benchmark seem to be weakening. Data next week will show whether pay growth slowed again in November, which would further undermine the case.

After a tumultuous start to 2016 for global markets, eight of the nine members of the Monetary Policy Committee, including Governor Mark Carney, voted to keep the benchmark rate at 0.5 percent in January. McCafferty struck out on his own for a sixth consecutive month, saying “upside risks” to domestic costs, potentially compounded by a drop in the pound, warranted a 25 basis-point increase now.

“He can probably hang on in there for a bit longer,” said George Buckley, an economist at Deutsche Bank AG in London. “A lot depends on what happens next week, with the wage and inflation data.”

Other global central bankers are shifting their view as oil drops and market turmoil raises concerns about the health of the global economy. Federal Reserve Bank of St. Louis President James Bullard, one of the most vocal policy makers in recent months arguing to raise interest rates, offered a more cautious analysis on Thursday. In a speech, he said the latest decline in oil may delay the return of inflation to the Fed’s 2 percent target.

Restrained Pay

In the U.K., BOE officials have put the labor market and pay at the center of their policy outlook. Wage growth has slowed to the least since February, and the BOE describes it as “restrained.” That’s helping to keep a lid on the headline rate of inflation, which hovered around zero for all of last year.

“If McCafferty was voting for the first time today, would he be voting to hike rates? I suspect not,” said David Tinsley, an economist at UBS in London. “He’s in danger of not showing much flexibility in terms of the data vis-a-vis his view.”

On the other side, a drop in the pound could bolster import prices and alleviate the currency’s drag on inflation, a factor also cited by McCafferty in the minutes of the January meeting. On a trade-weighted basis, the pound has fallen about 5 percent in the past two months. Sterling dropped 0.5 percent to $1.4336 at 11:03 a.m. London time, after reaching $1.4332, the lowest level since 2010.

“The only thing that would make him change is if wages start really tanking,” said Chris Hare, an economist at Investec in London. “He’ll probably retain an amount of confidence in the recovery next month. I don’t think his interpretation of the news will have softened enough to do an about-turn by then.”

McCafferty has form on shifting in vote. Exactly a year ago, he and fellow official Martin Weale reversed their pushes for a quarter-point rate increase after falling energy prices raised the risk that low inflation would become entrenched.

“Having already u-turned once, McCafferty would only retract his vote in the event of significant deterioration in economic conditions, such as a material increase in unemployment or if the Brexit risk were to rise so significantly that growth were to fall significantly below trend,” said Kallum Pickering, an economist at Berenberg in London.

So, the focus in the U.K. will be squarely on how things evolve before the February decision. That’s a key month for the BOE, when it publishes new quarterly growth and inflation forecasts alongside its decision.

According to Dan Hanson, an economist at Bloomberg Intelligence in London, wage growth excluding bonuses of below 2 percent in November would probably be enough to tip McCafferty’s vote to no change.

“McCafferty pinned his judgment on the recent depreciation of sterling,” he said. “Not seeing a significant rebound in wages next week would see him change his vote next month. Any strength in wages will make him feel like he’s vindicated in his judgment.”

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