Is the Feds Independence Being Tested?
Even in the midst of a busy earning season, discussions on central bank policy never seem to go away. Perhaps the most exciting of the current round of rate setters meetings is here in the UK next Thursday, August 2nd; probability for a rate hike has been building up to 85% priced in, and this time round the MPC members are doing nothing to quash those expectations.
The last meeting had votes for a hike finely poised at 6/3 against. We have a feeling that Carney is in the hike camp, but unable to express that view as the Governor always votes with the majority, so it requires just one additional vote to hike to change the dynamic to 5/4 in favour. We think that vote comes from deputy governor Ben Broadbent. Last night he presented at the Society of Professional Economists and when questioned he claimed he did not know how he would vote and he would not tell anyway. This last point is meaningful in our view as by sharing his voting thoughts, like many central bankers do, if it was a yes to hike it would have “nailed on” the hike for next week. So he could not reveal his intentions.
Much more interestingly, the MPC will add another very useful tool to their forward guidance next week by revealing what they currently estimate the neutral rate should be for the UK, or R* as it is known. R* is going to be considerably lower than pre crisis levels, but it is fair to say that R* has recovered from its post crisis lows. Estimates for the UK are quite broad, so it will be very interesting to see what the Bank of England thinks it is. A figure in the 1.75% area is what we would be expecting, although the Bank may start a little lower and bring it up over time.