Bank of England Breaks From ECB’s Effort to Curb Market Rates
(Bloomberg) -- The Bank of England this week is set to drift further away from the European Central Bank and other monetary institutions actively trying to rein in the surge in bond yields.
A week after the ECB pledged to speed up the pace of its asset purchases, BOE policy makers are expected to maintain theirs on Thursday. They are shrugging off an increase in market borrowing costs that pushed the yield on U.K. 10-year bonds to the highest since before the pandemic started last year.
While the ECB reads higher yields as a threat to the euro zone’s already-delayed recovery, BOE Governor Andrew Bailey on Monday joined his colleagues in viewing it as a sign of optimism that the economy is about to rebound from its worst recession in three centuries. Britain also is benefiting from Prime Minister Boris Johnson’s rapid roll-out of coronavirus vaccines, opening the prospect that most Covid-19 rules may disappear by the end of June.
“Deflationary pressure appears far more deeply ingrained in the euro zone than in the U.K. or U.S.,” said Steven Barrow, head of G10 strategy at Standard Bank. “We can understand why the ECB is more fearful.”
Bailey’s stance puts the BOE closer to the U.S. Federal Reserve in responding to investors who have driven up yields around the globe, confident that a post-pandemic boom is on the way. The pound is near its strongest against the euro in more than a year. Benchmark gilt yields have risen more than a half percentage point in the past three months, more than any other major west European nation.
“We have seen some increase in interest rates over the last month or so, as have other countries,” Bailey said Monday in an interview on BBC radio. “My assessment so far is that is consistent with the change in the economic outlook.”
With the key lending rate at a record low of 0.1%, the focus is on the BOE’s asset purchase program, which is buying 150 billion pounds ($208 billion) of bonds this year to keep a lid on market borrowing costs. Economists are looking for signs of when the Monetary Policy Committee might adjust the rate of purchases -- either to tighten or loosen stimulus -- from about 4.4 billion pounds a week currently.
“I expect the doves on the MPC to remind everybody that it’s not because you’re able to vaccinate people that you can justify this kind of tightening in your financial conditions,” said Fabrice Montagne, an economist at Barclays Plc in London.
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“We expect policy makers to conclude that most of the recent pick-up in yields reflects the improving outlook. The minutes of the meeting are likely to emphasize downside risks to the outlook, the flexibility of the central bank’s bond buying program and the guidance on the conditions for tightening.”
--Dan Hanson, Bloomberg Economics. Click for the full REACT.
Britain’s outlook is diverging from the rest of Europe’s. A slow pace of vaccinations has held back the euro zone’s economy and threatened to extend lockdowns. Output is expected to contract again this quarter and not return to its pre-pandemic size until well into next year.
By contrast, the U.K. has enjoyed a string of good news on the economic front. While output is set to contract in the first quarter, the BOE expects a rapid rebound to pre-Covid levels over the rest of 2021.
Since the BOE published its forecasts last month, more than a third of the U.K. population has received a vaccine, and the output shrank less severely than expected during a national lockdown in January. Also, Chancellor of the Exchequer Rishi Sunak delivered his own jolt by extending furlough payments to those prevented from working. Shops are due to reopen in the middle of April.
“The sequence of generally positive events would eventually push the BOE into implicitly acknowledging that the next move in rates will be up,” Allan Monks, an economist at JP Morgan Securities Plc, wrote in a note. “We do not expect the MPC to engage in this debate now.”
Instead, he said, the minutes accompanying Thursday’s decision likely will point out lingering downside risks to the growth forecast. Those include Europe’s sluggish vaccination program, which threatens further outbreaks and longer restrictions on activity.
Bailey has tried to point out risks to both sides of his forecasts in recent appearances, noting on Monday that the MPC has a “balanced picture of risks.”
“The risks on the upside are that there has been a very large build-up in savings in the economy, largely because people have not been able to do the things they normally do,” Bailey said in an interview on BBC radio.
For Bloomberg’s latest comment and economic surveys:
- SURVEY REPORT: U.K. Economic Forecasts in March 2021
- BOE QE Target Seen at GBP895B on March 18 (Survey)
- U.K. 10Y Bond Seen at 0.70% by End-1Q21 (Survey)
- U.K. 2Y Bond Seen at 0.06% by End-1Q21 (Survey)
- Bank of England Recent Policy Comments and Decisions
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