MPC expected to hold but close vote possible
Simon Ward
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New Star’s MPC-ometer model is forecasting a 7-2 vote for unchanged rates at this week’s meeting (two votes for a 25 b.p. cut). This is the same forecast as last month, when the actual vote turned out to be 8-1, with David Blanchflower the lone dove.
Two key factors have steered the model away from predicting a cut this month. First, GDP was estimated to have grown by a robust 0.8% in the third quarter – the MPC has never eased following a number this strong. Secondly, survey-based measures of consumer and producer inflation expectations remain elevated.
My personal view is that the vote will be closer than the model suggests. The “credit crunch” is difficult to analyse but there is a risk of a large negative impact, justifying giving lower-than-normal weight to recent economic strength. Also, three-month interbank interest rates remain at least 25 b.p. above where they should be at a 5.75% Bank rate, which could argue for an offsetting easing move.
I like to compare the MPC-ometer’s forecasts with the vote of the Sunday Times Shadow MPC. The Shadow MPC was spot on with an 8-1 decision in October and has voted unanimously for unchanged rates this month. Over the last 13 months, the MPC-ometer’s average forecast error has been one vote (0.9 to be precise) versus three votes (2.6) for the Shadow MPC.
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