Four 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 November is +10 basis points (bp), suggesting four votes for a 25 bp Bank rate rise and five 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.

The further increase in the model reading this month from +5 bp in October reflects robust third-quarter GDP expansion, additional strength in purchasing managers’ surveys, higher consumer inflation expectations and a buoyant stock market.

The judgement here is that the MPC has already fallen “behind the curve” by failing to respond to compelling evidence of monetary excess, such as a surge in annual M1 growth into double-digits. The fact that the MPC-ometer has yet to signal a tightening move is not at odds with this view, since the Committee has kept policy too loose on average historically.

The current position, of course, is unprecedented because the MPC has locked itself into a straitjacket in the form of its “forward guidance” framework. This guarantees that necessary policy restraint will occur even later than in previous cycles, in turn implying another significant inflation overshoot in 2014-15, with subsequent negative consequences for economic growth.

*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.
**Such an outcome would imply an average interest rate vote of 11 bp, i.e. four-ninths of 25.