At the next Monetary Policy Committee vote, most are expecting Martin Weale and Ian McCafferty to vote for a 0.25pp rise in interest rates. They have been voting for just this since August.
The curious thing, if you look at this through the lens of modern empirical macro, is that, if their vote stays this way, they will have kept that constant distance between their own preferred vote and the MPC’s preferred stance. This is curious because, if you were to take a typical macro model and perturb it with an unwanted drop in interest rates, say by 0.25pp for 6 months, you would get quite a pronounced increase in inflation, and one that, once rates could be set freely again, would prompt you to tighten sharply to avoid inflation spiralling out of control.
And this is one way of looking at what is going on from the perspective of Weale and McCafferty, the mystery MPC hawks. Each month, they choose their preferred interest rate and each month the majority confound them and set rates 0.25pp lower than they think appropriate, for six straight meetings. [Six assuming they vote as I predict at the January MPC meeting]. So the puzzle is why each month they come back with the same suggested 0.25pp rise. Because, after the first month’s mistaken interest rate vote [from the perspective of W&M], they ought to have put their heads together and said: hang on, not only do we need rates 0.25pp tighter on account of us seeing the recovery’s heat for what it is, unlike our mistaken colleagues, but we need to tighten more in response to the interest rate mistake that our colleagues have injected.
An analogy. Imagine MPC collectively steering a mini-bus around a corner. W&M see the corner looming and vote for a slight tweak of the steering-wheel. The others, who W&M must assume have not recently had their driving spectacle prescription updated, vote for driving straight ahead. A few seconds later, W&M, fearing disaster, vote for a full-on yank of the wheel to keep the minibus on track……
There are three ways of reconciling W&M’s persistent, finely calibrated hawkery with policymaking that looks like how policymaking should be done. One is that these kind of macro models have the macro-economy completely wrong. Many would plump for that reason. But these models are just the ones that W&M are using at the BoE to forecast inflation and inform their vote, and we don’t hear anything from them about how they see the world operating differently.
A second reason is that as news about the economy unfolds, it reveals that the economy is just a little bit cooler than W&M thought, enough to offset each month’s interest rate mistake that they would otherwise be correcting. However, we also don’t hear anything from them about how they are slowly revising their view toward that of the majority.
A third reason is that, although required tightening for W&M does mount up each month, in just the way described above, W&M’s vote for a constant 0.25pp rise represents but the first step along a tightening plan that becomes more pronounced in its entirety as each month winds forward. Yet, it would seem odd if this was the reason, because neither W&M indicate that this is what they would plan for rates. It’s possible that they have conceived of these ever more aggressive plans, so the constant 0.25pp vote is coherent, but that they feel constrained by the convention of not talking explicitly about future interest rates. But this would be somewhat odd too in these days where ‘forward guidance’ has made such talk permissible.
Another way to explain the W&M constant hawkery is that their vote is tactical. Although they would prefer an ever more aggressive tightening, as the monetary policy mistake mounts up, they hope to convince some of the more hawkish doves to vote their way. Better a compromise tightening than none at all, they might think. In which case, as the monetary policy mistakes mount up, offering a mere 0.25pp rise [and being turned down by the hawkish doves] must get ever more miserable for them. The first time they offer it, they are stating their preferred vote. The second time, the 0.25pp rise is perhaps a little lower than they might want. The third time, this 0.25pp rise looks meagre relative to the tightening required to make up for lost time. And so on. Such tactics might actually be in the realpolitik of MPC strategy. But if this is what is going on, it would be entirely underhand. The W&M votes have been defended as being just what they would wish for.
It’s somewhat unfair to pick on Weale and McCafferty in this way, as they are not the only MPC dissidents to behave like this. Danny Blanchflower’s votes looked the same, only on the doveish side of MPC’s. Andrew Sentance’s hawkery was similarly persistent. And you can find the same behaviour if you go back to the MPC wars in the late 1990s/early 2000s when Messrs Wadhwani, Julius and Allsopp were heralding the ‘New Economy’, and arguing for lower interest rates [and signalling forecast dissent in the iconic ‘Table 6b’].