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Bank of England Is Already Easing Off Its Pandemic Response

Bank of England Is Already Easing Off Its Pandemic Response

The Bank of England’s decision to increase its pandemic bond-buying program by another 100 billion pounds ($124 billion), taking the total up to 745 billion pounds, suggests that its emergency response is accelerating.

In reality, the BOE is reducing the pace of its interventions as the economic outlook brightens somewhat. The central bank now expects the U.K.’s gross domestic product to have fallen by 20% in the second quarter. That’s not great, but it’s better than the previous estimate of a 27% plunge. 

BOE Governor Andrew Bailey is sending a clear signal to the markets by cutting the number of weekly buying operations from three to two. On average, the bank has bought about 13.5 billion pounds of bonds weekly since April. That will now almost halve to 7 billion pounds, and will fall again to less than 5 billion pounds per week from August.

The prospect of having less money sloshing around pushed up yields on 30-year government bonds, although shorter-maturity gilts remained pinned down by the very low official interest rate, which remained unchanged at 0.1%. 

Bank of England Is Already Easing Off Its Pandemic Response

The BOE’s chief economist, Andrew Haldane, surprisingly voted for no increase in the QE program, underlining the shifting mood at the central bank. The markets have been expecting another 100 billion-pound bump in the asset-purchase scheme in August, but that looks less certain now — unless economic conditions worsen.

This is a notable divergence from the European Central Bank, which increased its pandemic response by 600 billion euros on June 4, and which on Thursday boosted its ultra-cheap liquidity funding to banks by a staggering 1.3 trillion euros. The Brits are more in line with the Americans. The U.S. Federal Reserve has cut its daily QE purchases to the single billions from the $75 billion pace at the height of the crisis — even though the Fed has started buying corporate bonds.

As the U.K. Treasury only needs to raise 72 billion pounds more by the end of July, it makes sense for the BOE to ease back as well. With gilt yields very close to an all-time low, it might be time for regular investors to take a more normal share of the new supply.

The bank will need to remain alert to any changes in the economy: The reopening of U.K. business is painfully slow and important decisions need to be made on whether to reduce the two-meter distancing rule. But, for now, the outlook is less bleak. If the BOE had been worried that its response wasn’t working, it would have increased its QE program by more — the higher end of market expectations was for 200 billion pounds. It’s a comforting sign that it didn’t.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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