My MPC-ometer model has been suggesting an October rate cut for several weeks and recent data have confirmed the forecast. According to Reuters, only 21 out of 66 economists projected an October move in a Reuters poll last Wednesday but opinion had shifted by the end of the week, with 49 respondents expecting a cut, of which four forecast a half-point reduction.

The MPC-ometer was designed to answer the question “How will the MPC vote given incoming data and the current level of Bank rate?” Used in this way, the forecast is for either a 7-2 vote for quarter-point cut this week or – more likely – 1-5-3 (Blanchflower voting for a half-point again).

The trouble with this approach currently is that the model is unlikely to capture fully the impact of the seizure in money markets on the MPC’s thinking. One way of addressing this is to change the question to “How will the MPC vote given incoming data and the current level of three-month sterling LIBOR?” On this basis, the model predicts a unanimous vote for a cut and an evens chance of a half-point reduction. (This is based on today’s 6.27% three-month LIBOR fixing.)

Another issue is that the Committee will have an early look at the September CPI figures, which may show annual inflation moving above 5%. This would have a small effect on the above forecasts but a quarter-point cut would still be odds-on even using the model in the normal way.

While several MPC members may vote for 50bp, I suspect a majority will prefer a quarter-point cut with a follow-up move next month. Current economic risks stem less from the price of money than the complete breakdown in the plumbing of the financial system, a problem better addressed by direct official intervention, including the Bank of England intermediating money and credit flows – see previous post.