Being a blog means FT Alphaville can always react quickly to news developments. Unrelatedly, let’s write about last month’s Bank of England Monetary Policy Committee meeting.
As ING’s James Smith wrote in a note published this week (ahead of the next MPC decision, which will be announced on Thursday):
Drama is not often synonymous with the Bank of England. But February’s meeting was nothing short of a bombshell. Catherine Mann, who for months had led the opposition to rate cuts, surprised everyone with her vote for a 50bp rate cut. And that posed the question: if the arch-hawk is prepared to vote for faster rate cuts, will the rest of the committee soon follow suit?
From an MPC-watching, inside-baseball perspective, Catherine Mann was already the second-most-interesting member of the current lineup*, and this dovish pivot adds a new feather to her plummage.
As we’ve previously observed (see parts one, two and three), there are lots of ways of looking at the MPC’s voting patterns. One of our favourites is the hawk/dove spectrum, on which we ranked members past and present by net their voting pattern (hawk votes minus dove votes).
Here’s how that looks with the latest data (see you tomorrow, mobile users):
Net figures miss nuances. Two members with the same notional dove/hawk score might actually have had radically different voting patterns.
A score of zero, for example, could indicate a flawless record of voting with the majority, but could also capture a serial rebel who happened to fly with the hawks and doves in equal measure.
To look at this effect, we can sort all MPC members into one of four categories based on their patterns of rebellion: those who always won their votes, those who only ever rebelled hawkishly (“pure hawks”), those who only ever rebelled dovishly (“pure doves”), and those who rebelled in both directions.
This requires us to come up with two new bits of nomenclature. For the serial winners, we’ve settled on “turkey vultures”, with Bryce reasoning that as carnivores that don’t hunt, they land neatly between hawks and doves. For the both-way rebels, we picked “hybirds”, the category which Mann recently joined (having previously been a pure hawk).
Armed with this taxonomy, here’s a mildly interesting chart:
We were surprised that hybirds are so high up (note that if we treat ex-dep gov Ben Broadbent as two separate entities in his internal and external phases, there would be one more turkey vulture) — and that the distribution is so even.
Let’s try breaking down those bars above to show the actual members involved, ordered left to right from more dovish to most hawkish (for hopefully obvious reasons, not an interesting measure for the turkey vultures):
There’s… something here. Observations:
— Having recent joined the hybirds after a long spell as a pure hawk, Catherine Mann is easily the most hawk-skewed hybird.
— Conversely, Stephen Nickell is the most dove-skewed hybird.
— Sir Charlie Bean (former deputy governor for monetary policy) is the only deputy governor to have rebelled solely in a dovish way.
— Pure hawks have a much more even mix in terms of internal/external.
— Bean’s predecessor, Rachel Lomax, is the only MPC member to have rebelled evenly in both directions (having gone three times each way).
By this measure, Mann is exceptional — for now, at least. But this possibly undersells her pivot. After all, years might have passed between any given hybird’s hawk and dove turns, while Mann pivoted from hawk to dove in the space of two meetings:
Has such a rapid shift ever happened before?
Yes. The quickest one-member pivot in MPC history was external member William Buiter, who flipped between meetings in the late ’90s. Pointlessly, we can track the gaps between each hybird voting one way (hawk/dove) and then the other…
…and see Mann’s pivot is the second-fastest on record.
Obviously this is ✨ reductive ✨ in that it only reflects hawkishness or dovishness as expressed by actual vote rebellions, and ignores that a swap from a rebel stance to voting with the majority is equally significant to the other way around.
And, by our chosen definition, in all instances but Buiter’s 1998 turn, the pivot encompasses a period of neutrality, during which anything might have happened (Sir Dave Ramsden’s first “pivot” took nearly three years, and covered most of the Brexit process and the height of Covid-19). Basically: the bigger the gap, the more trivial the pivot.
So what’s the story behind Buiter’s one-meeting swap — to raise rates at the August 1998 meeting, and then to lower them in the September 1998 meeting? The BoE’s spreadsheet of MPC votes records these only as “increase” and “decrease” rather than a specific preferred rate, but the minutes of the time offer more detail.
At the August 1998 meeting, members were fretting about Asian economies; US growth and stock prices; discrepancies between Office for National Statistics data and private surveys; and wage growth feeding through into inflation.
The MPC eventually ended up in a three-way split, with seven votes to hold Bank Rate at 7.5pc, one to cut (DeAnne Julius) and Buiter’s vote to raise.
Buiter’s rationale is spelled out in the minutes (our emphasis):
The arguments for raising rates were as follows. The central projection for inflation was above the target throughout the forecast period, except at the 2 year horizon. The risks to inflation were, moreover, on the upside throughout – and especially towards the end of – the forecast period, so that the mean projection of inflation was above 2 ½% throughout the forecast period. On one view, it seemed likely, notwithstanding the considerable uncertainties, that inflation would be increasing beyond the two-year horizon, as the effects of sterling’s appreciation on net trade wore off and as the impact of government spending on domestic demand came through. Thus, just as inflation outturns had persistently been above target in the past, it was more likely than not that inflation would be above target in the foreseeable future. This would be damaging to credibility, and called for an immediate 25 basis point rise.
By September, everything and nothing had changed. In the intervening period, Russia had slumped into a financial and political crisis, the Japanese growth outlook had worsened, and commodity prices had come under pressure. Meanwhile, BoE staff were, uh, still struggling to reconcile ONS figures with private surveys.
Once again there were seven votes to hold, but this time Buiter swung, joining Julius in the dovish camp. Their rationales appear to be separate (our emphasis):
37. On a second view, although the outturns for official data on domestic activity were broadly as expected, business surveys were very weak for the second consecutive month, the equity market had come off the top and the correction might still have a long way to go. The change in the world outlook was also significant news. Taking these factors together there was sufficient evidence already to shift the central projection for UK inflation from above the target to below. On this basis, rates should now be cut by 25 basis points.
38. On a third view, there had already been a danger of undershooting the inflation target and the previous case for a cut in rates was reinforced. The full extent and timing of the reduction would be a matter of tactics but it should start immediately. Even after interest rates started to fall, sterling would be subject to upwards as well as downwards pressure, given the relative strength of the UK economy and investors seeking a safe haven from world events.
Assuming they are separate, the second argument (point 38.) about the risks of an inflationary undershoot appear to be Julius’s, given they echo those from a month before. Which would suggest those following point 37 are Buiter’s. The facts changed, and he (majorly) changed his mind.
ING’s Smith continues:
The disagreement boils down to two things. First, Mann believes in a much more activist approach to setting policy than her peers. She was more aggressive on rate hikes, and now takes the same view on cuts. We sympathise with that view; the fixed-rate nature of UK lending (especially mortgages) means that policy changes take longer to feed through than they once did. If you believe the outlook for growth and inflation is shifting, then gradual rate cuts are initially much less effective than they once were.
And that’s the second point: Mann does believe the outlook has materially shifted. In recent comments, she has talked about the risk of “non-linear” falls in employment, in response to hefty tax hikes coming through for employers next month.
Mann may be right or wrong — and may have been right or wrong in the past — but a willingness to pivot is basically good, we reckon. Glory to the hybirds.
*First place is obviously Sir Dave, Keeper of the QT Envelope.
