BOE to Keep Backing Stimulus Even as Splits Emerge on Economy

(Bloomberg) -- Bank of England policy makers are set to keep delivering ultra-loose monetary policy even as they disagree over the pace of economic recovery from the coronavirus-triggered recession.

While officials led by Governor Andrew Bailey have different takes on how the economy is emerging from the pandemic shock, the next policy decision on Thursday is expected to leave interest rates at a record low and the asset-purchase program unchanged.

It’s a stance that economists reckon will last many months, which should provide certainty for households, companies and investors after the worst recession in living memory.

“There seems to be a division between different members on how the recovery is progressing,” Nomura International Plc. economist George Buckley said. “But I suspect there is probably not going to be much division when it comes to the next vote.”

The alignment differs from the last big slump in the 2008 global financial crisis, when officials led by then-Governor Mervyn King clashed both on the economic outlook and the response to it.

It was a period which witnessed simultaneous votes to raise and cut interest rates and, as the turmoil deepened, the disagreement played out in a public spat that left the institution bruised.

This time around there are splits over the economic outlook. Chief Economist Andy Haldane is optimistic about a quick recovery, while Silvana Tenreyro says the bounceback will probably be limited.

But on monetary policy there’s less division, even though Haldane voted against the latest round of quantitative easing, preferring to wait for more evidence.

The BOE is already buying an additional 300 billion pounds ($393 billion) of bonds as part of its emergency virus response, and economists expect it to top that up by another 50 billion pounds before the end of the year.

Policy makers are expected to stand pat on both interest rates and asset purchases when they announces their next decision on Aug. 6. More interesting will be the bank’s updated outlook for the economy, which may offer clues on the likelihood of further stimulus.

Some disagreement among the members of the MPC is inevitable, given they are dealing with historically elevated levels of uncertainty. One gauge tracked by economists at the BOE -- forecaster disagreement -- surged almost 2,000% from January to its peak.

But the variations are relatively nuanced, focused on what time horizon to gauge the economy’s prospects.

What Bloomberg Economists’ Say...

“The focus will be on the central bank’s projections where we expect the recovery to look less ‘V-shaped’ than in May. Attention will also be on whether policy makers drop any hints that interest rates may go lower.”

-- Dan Hanson, senior U.K. economist. Read his full PREVIEW.

Haldane has emphasized high-frequency data such as payment transactions and Google searches, which he says are broadly corroborated by official GDP figures. He describes the recovery as “so far, so V.”

Tenreyro has focused more on risks slightly further out. She’s touted the idea of an “interrupted or incomplete ‘V-shaped’ trajectory,” distorted by risk aversion and restrictions on economic activity, as well as joblessness.

Bailey has played down suggestions that the rebound is looking robust, saying it ultimately depends on factors that are difficult to foresee such as how quickly people return to work, how shops and restaurants cope, and the extent of permanent economic damage.

Much is still unclear given the lack of a vaccine and flareups of the virus that have put some parts of the country back into partial lockdown.

Dissenting votes have been relatively rare in recent years, leading some critics to suggest the BOE has fallen victim to “groupthink.” Since former Governor Mark Carney took control in 2013, less than 40% of meetings had votes against consensus. That compares to more than six in 10 during the tenure of his predecessor Mervyn King.

“Haldane has acknowledged that risks are two sided, but ultimately tilted to the downside,” said Sanjay Raja, an economist at Deutsche Bank. “The August meetings could break the silence on policy direction, one way or another. My best guess is that if we get something exciting, it’s likely to be tilted to the dovish end of the spectrum.”

Regardless, Raja said, there will be some time “before we get any tangible policy moves via more QE or a rate cut.”

Almost all BOE officials have flagged the danger of a jump in unemployment, a particular concern as unprecedented government support starts to unwind from this month.

While the furlough program covering 9.5 million jobs has helped keep jobless figures stable, it’s also delaying and clouding what the ultimate hit to the labor market will be.

“We’ve got this issue of whether it’s going to be a V or not, which is obviously the debate between Haldane and Tenreyro,” said Nomura’s Buckley. “It’s just an issue of if the recovery continues.”

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