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Bank of England preview: Does Bailey announce more QE now?

May 4, 2020
It’s the turn of the Bank of England on Thursday, who meet after the madness of March for new Governor Bailey’s first quarterly Monetary Policy Report and only second scheduled meeting.

No changes are expected with much of the market’s attention on how the bank sees the timing and pace of any potential recovery and if they will have to scale up quantitative easing. This will be highlighted by the new forecasts which are released for the first time since January.

In a slight change to normal proceedings, Governor Bailey has decided that the bank will publish the rate statement at 7am UK time, or five hours earlier than normal. This will be accompanied by the quarterly Monetary Policy Report, with the Governor then briefing reporters three hours later at 10am UK.

Emergency package

Since the outbreak of the corona crisis, the MPC has already announced a comprehensive package of easing measures, including cutting rates twice in March to a record low of 0.1%. It has also ramped up its bond-buying programme of Gilts and corporate bonds by a record £200bn, which was larger than expected, and launched a new Term Funding scheme. This has succeeded in calming the gilt market and ensuring the government can fund its crisis stimulus measures at cheap rates.

A strong signal to do more?

The BoE has so far conducted a little more than one third of these additional asset purchases, since the programme was launched on March 19, which is roughly double the rate of purchases seen during the 2008 financial crisis. With just under two months to go before the bank reaches its ceiling on current estimates, some are expecting a further expansion of the programme at this meeting. The minimum expected is that the MPC will indicate its willingness to ease policy further should it be required, with a decent probability that the BoE will signal an increase in its bond purchase target at its next meeting on June 18. The key issue is if the bank chooses to do nothing, then gilt yields may spike after it has completed its purchases towards the end of June.

Recovery forecasts

While the Bank’s quarterly Monetary Policy Report might adopt a different format to normal with respect to its economic forecasts – which are widely expected to present a range of near-term scenarios based on different speeds of reopening and recovery, similar to the ECB – the outcomes will present the sharpest contraction in the UK economy for at least a century. This will most likely assume a 15%+ peak-to-trough output fall with the risks to both growth and inflation likely skewed to the downside.

Of course, the historic fall is now less important than what the recovery looks like and much focus will be on if the MPC pushes back against any ‘v-shaped’ upturn, with unemployment due to remain elevated for some time. The blurred reopening plans of the government will also need to be clarified going forward, with the next strategy update not presented until Sunday.

GBPUSD

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Since GBPUSD bounced from multi-year lows near 1.14 to the 50% retrace level just above 1.23, it has struggled to push higher finding resistance on a couple of occasions around the 200d MA. The pair has been confined to a 1.22/1.2650 range more or less since late March after a sharp and rapid retreat from last week’s high at 1.2644. With 1.24 looking like a pivot, the pound may come under pressure if the BoE disappoints, but only a breach of near-term support at 1.2370 indicates a top is in place at 1.2644.

Any positivity, from either the bank or the easing of lockdown measures from the government, will push cable higher. In this scenario, also watch out for strong support at 0.87 in EUR/GBP to see if it can hold again.

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