A week before the October MPC meeting the MPC-ometer forecast a quarter-point rate cut - at odds with the majority view of no change in a Reuters poll. By the time of the decision the projection had changed to half a point, allowing for the "shock" from escalating financial turmoil - see here.

Minutes of the special MPC meeting on 8 October confirm that recent financial events have resulted in a fundamental shift in the Committee's thinking. The focus now is on averting the "tail risk" of a severe recession and significant inflation undershoot. In terms of the MPC-ometer, this shift can be captured by "switching on" the shock variable that played a key role in explaining the MPC's behaviour after the 9/11 terrorist attacks.

The model's forecast will also depend importantly on Friday's third-quarter GDP report as well as consumer and business surveys to be released around month-end. Assuming a quarterly GDP decline of 0.2% and unchanged survey responses, the -ometer suggests a three-quarter-point cut at the next meeting on 5/ 6 November.

As discussed in previous posts, an alternative version of the model assumes the MPC targets interbank interest rates rather than Bank rate. This projects a full-point Bank rate cut in November if three-month LIBOR is above 5.75% at the time of the meeting (fixed at 6.04% today).

Both versions suggest the MPC will go on hold in December and January if the November forecasts prove correct.

For comparison, the overnight indexed swap curve currently discounts a 62 basis point cut by 6 November with further falls of 14 bp in December and 17 bp in January.