Bank of England May Beat the Fed to Tapering
(Bloomberg Opinion) -- With global inflation set to accelerate, investors accustomed to stimulus-buoyed asset prices are assessing which major central bank will be first to turn off the taps. Although attention has focused on the Federal Reserve, the Bank of England could well initiate stepping off the monetary accelerator.
The U.K. economy is already poised to grow by more than 7% this year, beating both the U.S. and European Union and possibly leading the pack in 2022 as well. And while the four-week delay to reopening the economy until July 19 will trim output this quarter and next, the shortfall will get made up by the end of the year. Bloomberg economist Dan Hanson sees the later reopening curtailing gross domestic product growth by 0.4% to 2.1% in the third quarter, but boosting the final quarter by the same amount to 1.4%.
Key to this momentum is the largest rainy day hoarding of any developed economy. A third of Brits have increased their savings since March 2020, compared with about a fifth of people in the U.S., Germany and France, according to a recent survey by YouGov Plc. Robust consumer confidence is also stoking the recovery, with figures this Friday expected to show a further rebound in optimism.
Figures last week showed annual U.K. inflation accelerated to 2.1% in May, faster than the 1.8% predicted by economists and exceeding the BOE’s target for the first time in almost two years. Higher prices for fuel, eating out, clothing and recreational goods drove the advance.
The U.K. central bank expects inflation to peak at about 2.5%, with a return to target by year-end that will hold for the foreseeable future. But consumer prices could make further headway, especially if more of those savings get spent once the economy unlocks fully.
One welcome side effect of a resurgent economy is that the Office of Budgetary Responsibility’s March estimate of government borrowing has turned out to be about 20% too high. Its deficit forecast for the fiscal year ending March 2022 of 234 billion pounds ($325 billion) is almost certain to be revised lower — hence there’s less need for the Treasury to borrow as much, or in turn for the Bank of England to buy as many gilts via quantitative easing.
With the economy running hotter than anticipated, the central bank will need to get creative in how it starts to reduce monetary stimulus. The simplest route is to stop reinvesting the proceeds when its gilts mature. In March, for example, it will receive about 27 billion pounds when the 4% 2022 bond gets repaid. Rather than plough that cash back into the market, that chunky redemption provides a perfect opportunity to begin reducing the balance sheet.
This would be proper tapering. Merely halting the flow of purchases, as the BOE did up until last spring, is merely a half-way step. Until the overall stock of bonds held in the monetary system reduces, there is still ongoing stimulus.
Telegraphing such a move well in advance should ameliorate the risk that pulling back support leads to a credit crunch. And avoiding a taper tantrum would set a handy precedent for other central banks grappling with how to unhook financial markets from their addiction to endless QE.
The guardians of financial stability are well aware that this is a tricky juncture. “This is the most dangerous moment for monetary policy since inflation targeting was first introduced into the U.K. in 1992,” Bank of England Chief Economist Andy Haldane said earlier this month.
He’s likely to repeat his vote to reduce the stock of asset purchases on Thursday, at his last meeting as a U.K. central banker. While his colleagues are unlikely to follow suit just yet, in the coming months they need to start wrestling with how to diminish the largess central banks have showered upon the economy and markets. “Better sooner rather than later” might turn out to be their guiding phrase.
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.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
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