Bank of England Review: As expected, but disappointing

Not enough QE?

As expected, the Bank of England kept their policy rate unchanged at 0.10% in a unanimous decision and increased their asset purchases with a further £100bn, taking the total now to £745bn. Some observers had wanted to see an expansion of £150bn-£200bn which would potentially get over some of the Brexit bumps that might appear towards the end of the year. In addition, the bank decided to slow the speed of bond buying, with the new purchases to be completed by year-end. This lower speed of monetisation will now see the bank buy roughly £6bln gilts per week, which is well down on the current pace of £11bln per week and a lot less than the market had assumed.

Notably, chief economist Haldane voted against further QE as he saw the recovery ‘materially faster’ than experienced in May and believes output losses should be half those feared last month. This hawkish dissent to effectively tighten financial conditions seems slightly incongruous with the current state of the UK economy, especially when there has been no official data yet to support this view of a faster recovery.

The bank itself also said that although downside risks remain, second quarter GDP may not turn out as bad as suggested in the May MPR, where the MPC indicated a decline of 27% below the 2019 last quarter. Inflation is expected to be lower in the coming quarters and has developed roughly in line with forecasts.

Other policies in the toolbox

There was no mention of taking the policy rate lower into negative territory or of yield curve control in the initial statement. However, in the press conference and later comments by Governor Bailey, the bank stated that the discussion on negative rates was not in any sense imminent and the MPC is trying to work out the implications for the economy.

Policymakers had generally appeared more comfortable with this idea recently, but as we said in our preview, we would probably need to see another unfavourable shock or a retreat in fiscal policy to put these policies firmly on the table as available tools. For sure, the mixed experiences in both Japan and Europe have left the bank needing some time to understand the full implications of such alternative policies, with the effects on the banking sector a prominent negative.

It would seem that other targeted policies are more likely, which include lowering the rate on its Term Funding Scheme that helps banks provide much-needed credit to companies. This would echo the current strategy of the ECB which has cut the cost of long-term loans while keeping its official interest rates unchanged.

Market impact

The initial spike in GBP with the hawkish headlines evaporated fairly quickly and cable has broken through support at the 100d MA at 1.2520. Today’s close will be significant for more downside if prices can hold below the 50% retracement of December’s high and this year’s low around 1.2462.

Money markets continue to be skewed lower as traders price in the bigger risk of negative rates than a rate hike over the next few years.