Bank of England Preview: Will the pound go lower with Bailey ‘ready to take action’?
It appears highly likely that the BoE will deliver more QE on Thursday as the rest of the MPC join other members Haskel and Saunders’ dissenting votes from May in a 9-0 decision. The Bank Rate will be left unchanged at 0.10% with a further £100bn of asset purchases taking the bank’s stock to £745bn. A major QE increase of this kind is more in keeping with announcements from the Fed and ECB so is slightly out-of-step with the how the BoE has acted before who have generally preferred smaller more regular moves.
Post-May meeting picture
We haven’t had much new information since the bank’s last meeting as most data released recently has been for April which captures the most severe lockdown period. Of course, that included the dramatic 20.4% GDP drop which underlined the damage inflicted by the pandemic at its peak. The associated decline in the labour market has been partially mitigated by the government’s job retention scheme, although the increase in the unemployment rate is likely to be acute with claims for universal credit surging.
Indeed, Governor Bailey recently said that the jobless rate may now have doubled from before the crisis and currently be around 10%. This will be a major area of concern for the bank going forward, especially if the gradual re-opening of the economy does not see these figures come down and these jobs are permanently lost. The key question is what happens next and how much long-term economic damage the public health emergency has caused.
Policy options going forward
Against this backdrop, the MPC has clearly spelt out its intent to take action. An increase of QE of £100bn would bump the size of the BoE’s balance sheet to over 30% of GDP, but still below the ECB’s programmes. This means that assuming an unchanged pace of asset purchases, the new stock target should last until the bank’s next MPR decision in August, by most estimates. A larger amount is definitely possible, as this would provide more certainty and easing through the Brexit deadlines where odds of a market-friendly outcome are fading.
Comments from policymakers indicate there is debate about negative interest rates, and much more so than under previous Governor Carney. There are positives, like the lower cost of finance to the real economy, and negatives (bank profits) but it seems unlikely to come at this meeting, where there is no MPR. It is also questionable if the current crisis really needs a further cut, after all, it is not the cost of (very low) finance that is holding back demand, but rather the virus and the government’s response to it by imposing lockdown measures.
Other less conventional policies like yield curve control are also still only under review, so the market would heed attention to any explicit mention. It seems only another adverse shock or a retreat in fiscal policy will put these policies firmly on the table as available tools.
Macro data in the form of the jobs report and inflation figures are released ahead of Thursday’s meeting. As with the ECB earlier this month, currencies are appreciating if they are backed by central banks delivering additional stimulus – ‘more is more’ – which goes against conventional wisdom. So, an expected QE boost of £100bn may be disappointing to the market, even if there is a big pre-commitment of more easing to come, whereas anything over £150bn will be positive for sterling as this would reduce some uncertainty through to next year. That said, concerns around Brexit and a UK-EU trade deal should prevent markets from pricing out the possibility of negative rates for now.
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