MPC-ometer now suggesting easing bias
Simon Ward
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Two weeks ago my MPC-ometer had a slightly hawkish tilt, suggesting an 8-1 vote for unchanged rates at this week’s meeting, with one member seeking a 25 bp increase – see here. However, the forecast has changed significantly as a result of 1) a downward revision to first-quarter GDP growth, 2) very depressed consumer and producer confidence readings for June and 3) falls in share prices and short-term gilt yields. The model now suggests a 6-3 outcome, with three doves voting for a 25 bp cut.
These are testing times for the -ometer as well as the MPC. With inflation overshooting, it is possible the MPC will assign greater weight to price indicators and less weight to activity data and financial markets than on average over its 11-year history – the period over which the model has been estimated. If so, the 6-3 forecast will exaggerate the Committee’s easing bias – the 8-1 vote by the Sunday Times Shadow MPC may prove closer to the mark. However, any error will be used to improve the predictions for subsequent months in two ways: first, the model is reestimated monthly so the weights will be adjusted in light of the July outcome; secondly, the prior month’s vote is included as an input so a less dovish result in July will feed back into the forecast for August.
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