The “MPC-ometer” model followed here suggests that the Monetary Policy Committee would be inclining towards tightening policy if it were responding to economic and financial developments in the same way as in the past. Specifically, the model reading for September is consistent with a majority decision for no change but with three MPC members dissenting in favour of a quarter-point Bank rate hike.
The MPC-ometer is designed to forecast the “average interest rate vote” of MPC 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 was -9 basis points (bp) in May, consistent with the MPC’s easing bias at the time – three members voted to expand QE every month between February and June. It returned to positive territory in August, however, and stands at +8 bp currently, suggesting three votes for a 25 bp Bank rate rise and six votes for no change.
The recent turnaround mainly reflects components of the model measuring economic strength but there has also been a small deterioration in future inflation indicators.
The model may have been rendered obsolete by the new forward guidance framework. The MPC, however, has claimed that the framework is intended to make explicit its existing “reaction function” rather than signalling any weakening of its (supposed) commitment to the inflation target. The model’s hawkish shift suggests that several members – not just Mr Weale – will be uncomfortable with the Committee’s current stance.
*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.
