BoE preview: The King has left the building

Sir Mervyn King was replaced as Bank of England (BoE) Governor by Mark Carney today. Thursday’s MPC meeting will be the first chaired by the new Governor and therefore potentially interesting even if recent economic developments do not give much reason to expect changes in the monetary policy stance. The first statements from Mr Carney following his somewhat surprising appointment earlier this year suggested that he was very dovish and in favour of more easing compared with what the BoE had already done at the time. Still, we believe markets could be slightly disappointed when Mr Carney takes over because 1) there is little need for immediate easing, 2) Mr Carney has one vote only in the nine-member MPC and 3) the forward rate guidance is complicated by the slightly unusual economic situation with slow growth on the one hand and high inflation and a fairly strong labour market on the other. However, he will probably want to do something to show that there is a new guy in town. Thus, this week?s meeting will be more interesting than the last few meetings. No more easing We find it unlikely that the MPC will choose to lower the Bank rate or increase the Asset Purchase Programme (do more QE) at this week?s meeting. Indeed, only three members have voted for more QE at recent meetings, including Governor King, and no members have voted for lower rates. It is hard to point to changes that warrant MPC members to have turned more dovish except for the fact that Mr Carney has taken over. Key figures have improved lately and point to a fairly broad-based, albeit gradual, recovery. We see further scope for key figure improvements in the near term despite the recent market nervousness. Another argument against further easing is that the BoE expects inflation to rise to around 3% in the near term and hover around this level during summer. If our current forecasts prove correct and a modest recovery is sustained throughout the year, we expect there will be no need for more easing this time around. Moreover, Mr Carney will only have one vote in the nine-member MPC, but as Mervyn King, who was outvoted on his call for more easing in recent months, noted Mr Carney may be more persuasive than he was. Anyway, it will be a new MPC, as new deputy governors are needed too. Mr Tucker, who was widely expected to become governor after King, is leaving and Mr Bean is retiring. Therefore, we do not rule out an even more dovish MPC going forward, but in our baseline scenario no more easing will be needed. August could bring changes Mr Carney wants to improve on communication and guidance. Thus, this week?s biggest surprise could be that the BoE issues a statement explaining why no changes have been made to the monetary policy stance. The August MPC meeting could be the one where Mr Carney brings more clarity about the bank?s forward rate guidance. By that time, Mr Carney has had some time to find his role, and a new inflation report will be discussed and presented to the public. Forward guidance is complicated in the UK, though. We believe it would be difficult to introduce a Fed-style conditional guidance when inflation is significantly and persistently above target and the labour market is fairly strong. And a nominal GDP target, in our view, has no relevance outside economic textbooks as revisions to historical values are way too big and too frequent for it to be used for policy guidance or as a policy target for that matter. The latest ONS revisions to UK GDP numbers support this view. Still, Mr Carney and other leading economists have recommended nominal GDP targeting. However, we will probably see some attempts to steer expectations about future policy changes. At least this is where we see the biggest potential for surprise. But the forward rate guidance will not necessarily bring about an easier monetary policy stance.