My MPC-ometer model correctly forecast the 25bp December rate cut but indicated a narrow 5-4 vote rather than the 9-0 revealed this morning. The four vote “miss” is the largest since March and compares with an average model error of just one vote since I began to use it to forecast in “real time” in October 2006. <\/p>\n
The minutes suggest the Committee was particularly concerned by renewed widening in interbank \/ Bank rate spreads during November: three-month LIBOR stood at 6.6% at the time of the December meeting. According to analysis presented in the Bank’s Quarterly Bulletin<\/em>, this increase reflected rising credit risk premia rather than a shortage of liquidity, which was the dominant factor during earlier spread widening in August \/ September. <\/p>\n The MPC-ometer assesses whether the prevailing level of Bank rate is appropriate given incoming economic and financial news. It implicitly assumes a normal relationship between Bank rate and interbank rates, which are the key driver of borrowing costs faced by households and companies. Under current unusual circumstances, there is a case for using the model to assess the need for a change relative to three-month LIBOR rather than Bank rate. If I rerun the December forecast using the prevailing three-month rate of 6.6% rather than the 5.75% Bank rate, the forecast changes from 5-4 for a cut to 9-0, as actually occurred. <\/p>\n This suggests the next cut could occur as soon as January if interbank rates fail to fall back significantly early in the New Year. Some decline is likely but three-month LIBOR probably needs to move below 6% to justify my current forecast that a move will be delayed until February. <\/p>\n