Markets

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Ford Motor Co. lost $86 million in Europe in the third quarter, a shortfall that Chief Financial Officer Bob Shanks called a surprise. "That decline is almost fully explained just by Brexit effects," he said last week. It's the kind of anecdote that just might deter a wavering Bank of England policy maker from raising rates on Thursday.

Stuck in Reverse
U.K. car sales have dropped for six consecutive months
Source: Society of Motor Manufacturers

Here at Gadfly, we say hiking rates would be a mistake. But we also reckon the futures market has gotten ahead of itself by placing a 90 percent probability on an increase this week, given the personal statements made by the nine members of the Monetary Policy Committee.

"Some withdrawal of monetary stimulus was likely to be appropriate over the coming months in order to return inflation sustainably to target," was how the central bank summed up its thinking after its September policy meeting. Maybe -- just maybe -- traders have overreacted by interpreting "coming months" as meaning "at the next available opportunity."

Two calls for a hike are a given. Ian McCafferty and Michael Saunders started voting that way in June, and have maintained that stance. Saunders has been the most vocal about taking back last year's emergency rate cut, arguing "we should not maintain an overly loose stance as insurance" against Brexit.

But there are also two clear opponents to higher borrowing costs. The most dovish is the newest member to the MPC, Dave Ramsden, who told the Treasury select committee last month that in September he "wasn't in that majority" of those seeing a need for action.

Jon Cunliffe has similar doubts, stating last month that "we’re not seeing pay pressure and for me we’re not seeing sustained signs of domestic inflation pressure." On when rate hikes should commence, he said that "for me, when that process starts is a more open question."

So that gets you to 2-2 in the voting.

Silvana Tenreyro was careful last month to emphasize her view is "contingent on the data" and "if outturns are consistent...then I'd be minded to vote for a bank rate increase in the coming months." But she added a much more dovish caveat: "A premature increase might be very contractionary," she said. "If there was a mistake it could be very costly."

So we at Gadfly are claiming her for the doves, making a 3-2 vote for no change.

Ben Broadbent is hard to call. The inflation impact on households is "nearing its peak," he said on Aug. 4. "There's no doubt there are these uncertainties weighing, especially on investment, but people are holding their nerve." He also said the economy feels like it could handle higher rates. So let's chalk him up to the hawks for now, making the tally 3-3.

Gertjan Vlieghe is the policy maker probably most responsible for the futures market's emphatic backing of action this month. "The evolution of the data is increasingly suggesting that we are approaching the moment when bank rate may need to rise," Vlieghe said on Sept. 15. If evidence mounts that domestically generated inflation is accelerating, the appropriate time "might be as early as in the coming months," he said.

But in July, he said "this is an environment where a premature hike would be a bigger mistake than one that turns out to be slightly late."

As a former hedge-fund manager rather than an academic economist, Vlieghe probably pays more attention to the actual economic data than to economic theories about what should be happening, especially in the all-important wage growth figures.

Worse Off
Pay increases remain anemic, while inflation is accelerating
Source: Office for National Statistics

So we at Gadfly are claiming Vlieghe as a fence-sitter at Thursday's meeting, more likely to vote for the status quo than to risk snuffing out growth -- which gets us to 4-3 against a tightening.

Chief Economist Andy Haldane is arguably the most quixotic of the rate-setters. In September, he said raising rates would be "a sign of the economy healing." In June, he said faster inflation meant "we need to look seriously at the possibility of raising interest rates."

But he also conceded that Brexit threatens to end more messily than the scenario the BOE used in its May forecasts. "Underlying these Brexit effects is an assumption that the process is a strong and orderly one," he said. "This is a strong assumption. There could be a `Brexit break' in the economy."

Since those June comments, the prospect of a disorderly U.K. exit from the European Union has increased -- and the effects on consumer behavior seem to be starting to show. On Wednesday clothing retailer Next Plc revealed a 7.7 percent annual fall in sales in the three months to October; last month, the Confederation of British Industry said retail sales are falling at their fastest annual pace in eight years.

Sales Slowdown
The CBI survey's retail sales measure dropped to the lowest since March 2009
Source: Confederation of British Industry

If the ever-cerebral Haldane is more concerned about the faltering Brexit talks than he is about inflation, and if his previously optimistic stance on wage growth has been dented by the data, he too could remain opposed to a wage hike. Which would make the voting 5-3 against.

So if we've misread just one of Haldane, Vlieghe or Tenreyro, you could still end up with a 4-4 vote. Which in turn would leave Governor Mark Carney in a properly awkward position with his casting vote.

Backing a rate hike would make him responsible for implementing what several economists are calling a policy mistake. Backing away from raising rates would have us scribblers reaching once again for the "unreliable boyfriend" moniker that's attached itself to him, perhaps making the tag indelible and destroying forward guidance as a policy tool. As the analysis above shows, there's a non-negligible risk of this situation arising.

This week's policy decision is unusual in that while a majority of economists expect a rate increase, a similar majority say it's unwarranted given the state of the economy. MPC members, including Carney, are only human. They've prepared the markets for higher borrowing costs. But they can and should be forgiven if when the crunch comes, they decided against the first tightening in a decade.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Mark Gilbert in London at magilbert@bloomberg.net
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net