Has the Bank of England got more hawkish? No says RBS, they are just shifting focus

The MPC delivered a shock 9-0 vote on extending QE purchases in July. This followed 6-3 votes (including the outgoing Governor Mervyn King) since February and a strong market consensus for a 7-2 outturn (RBS: 6-3).
 
Let's start with the capitulation by the Doves, David Miles and Paul Fisher.

This is simply bizarre.

David Miles had voted for a £25bn increase in QE at every meeting since November 2012, had previously registered dissenting dovish votes for QE between February & June 2012, and as recently as 27 June published an article in the FT extolling the virtues of this approach.

Paul Fisher recently explained his support for a £25bn QE extension (in February) as 'the first instalment of a more prolonged run of purchases at a somewhat slower pace than previously' (26 February 2013). Apparently not.
 
The 'explanation' for the shift by the two doves is utterly unconvincing. The Minutes stated that because the Committee 'would be investigating other options. . . it was therefore sensible not to initiate an expansion at this meeting' (Para.28).

The 'therefore' is wholly misplaced. Inaction does not follow logically as the other options being considered by the MPC are part of the Committee's response to the Treasury-initiated review of monetary policy – a review that was launched in March 2013 and which didn't stop the Doves voting for QE extensions in April, May and June.
 
Whilst the July Minutes do not rule-out further QE gilt purchases in principle, for practical purposes such a course now seems highly unlikely – otherwise why register a 9-0 vote on QE?

The MPC could instead have repeated a 6-3 outcome which would have sent a mildly dovish signal in terms of longer-dated yields but without requiring the Bank to actually implement this.
 
Although QE appears to be off the cards in the near-term (well into 2014) two factors make us cautious about penning its obituary just yet.

Firstly, the UK's dire fiscal metrics and the heavy DMO issuance schedule mean the market may struggle to absorb this new supply in an orderly fashion without some central bank intervention.

Secondly, one presumes the Chancellor will not be overly enthusiastic about a rise in the government's borrowing costs at a time when the deficit-reduction process has stalled. Ruling-out QE forever hardly seems wholly consistent with the Treasury's view of what 'monetary activism' should entail.
 
Aside from the shock 9-0 vote, the text of the July Minutes was very similar to June and May vintages.

The analysis of the underlying economy was a little more upbeat but the Minutes' overall assessment was that 'developments in the domestic economy had generally been positive and broadly in line with the recovery laid out in the May Inflation Report projections.' (Para.22) Moreover, the recovery underway continues to be regarded as 'weak by historical standards' (Para.21).
 
The key conclusion we take from the July Minutes is not so much that they represent a 'hawkish' move but rather that the MPC's policy focus is gravitating away from QE and longer-dated rates and towards Bank Rate expectations and the shorter end of the curve.

The July Minutes make several opaque references to 'other options', but much of this seems to amount merely to dovish rhetoric and forward guidance (perhaps an explicit MPC Bank Rate forecast, though it is far from clear that this would have any major impact on market sentiment).

To be clear: the MPC retains a clear dovish bias – the 'policy easing' vote in July wasn't really 9-0 in the sense that several members continue to believe that 'further stimulus is warranted' (Para.28) and that the 'increase in [shorter-term] interest rates represented an unwelcome tightening in monetary conditions that, were it to persist, would risk hampering the emerging recovery.' (Para.25).

Perhaps the subsequent line of text will prove to be the most revealing: 'the Committee agreed that it was important to communicate that the implied rise in the expected future path of Bank Rate had not been warranted by the recent developments in the domestic economy.' (Para.25, our emphasis). Note 'communicate': words rather than actions seem likely to characterise any new MPC policy approach, at least in the first instance.