Two MPC members would be voting to raise Bank rate this week if the Committee were responding to incoming news in the same way as in the past, according to the “MPC-ometer” model followed here.

The MPC-ometer is designed to forecast the “average interest rate vote” of Committee members based on a small number of economic and financial inputs relevant for assessing the outlook for growth and inflation. Estimated in 2006, the model proved useful for predicting interest rate changes in the late 2000s; it also signalled the expansions of QE in 2011 and 2012*.

The model reading for October is +5 basis points (bp), suggesting two votes for a 25 bp Bank rate rise and seven for no change. The reading has risen from a recent low of -9 bp in May, when the MPC was contemplating further easing – three members voted to expand QE every month between February and June.

Some commentators suggest that a majority of the “old” MPC would now be in favour of raising Bank rate based on recent strong purchasing managers’ surveys – historically an important influence on the Committee’s thinking. The PMIs are included in the MPC-ometer but their influence has been countered by declines in several inflation indicators – in particular, consumer survey price expectations and CBI manufacturers’ price-raising plans. Financial market inputs, meanwhile, have yet to give a strong signal of imminent tightening.

Looking ahead, the MPC-ometer reading for November will depend importantly on the first estimate of third-quarter GDP growth released on 25 October. A moderately strong result, however, would not be sufficient, on its own, to push the model over the rate hike threshold**.

The new forward guidance framework, of course, suggests that the MPC will begin raising Bank rate later than in previous cycles, although Committee members have claimed that the framework simply makes explicit its existing “reaction function”. The guess here is that the MPC-ometer will cross the rate rise threshold around end-2013 but the Committee will delay acting until summer 2014, by which time unemployment will be at or close to 7.0% and inflation entering another upswing.

*The model was modified in 2009 to incorporate QE, with the relevant parameter implying that £75 billion of gilt-buying is the policy equivalent of a quarter-point rate cut.
**A quarterly GDP rise of 1.2% or more would be required, assuming no change in the other inputs.