BOE’s Bailey Says Don’t Be Deceived by U.K.’s Bounceback So Far

(Bloomberg) -- Bank of England Governor Andrew Bailey said the central bank is ready to support the U.K. economy through its long road to recovery as officials sought to reassure investors that they won’t tighten monetary policy anytime soon.

The pound gained on Thursday after the central bank released more robust projections for the economy and policy makers also hinted that they’re not ready to follow others in taking borrowing costs below zero. Still, Bailey stressed the risks to the forecasts were tilted to the downside, and said the BOE is ready to do more if needed.

“There’s a lot of hard yards to be done from here onwards,” Bailey said in a Bloomberg TV interview. “The reason we issued the guidance in my view was to say the forecasts can sometimes look beguilingly straightforward. There’s an awful lot of risk in there ad it’s obviously distributed one way. We will be therefore ready to lean in and support that.”

The more upbeat forecasts did little to temper expectations among analysts that another round of bond purchases will be required before the end of the year, with renewed lockdowns in parts of the country and the government’s program to support jobs drawing to a close. The Monetary Policy Committee stressed the economy is unlikely to fully recover before the end of 2021, slightly later than the previous scenario.

The mounting risks of a no-deal Brexit have also fueled speculation that the BOE might consider cutting interest rates below zero. Officials said that their review of such a policy is ongoing, but that its effectiveness could be hampered by the damage the crisis has wrought on bank balance sheets.

Investors are betting that rates will go negative in about September 2021. In a briefing to reporters following the decision, Bailey said the policy is “part of our toolbox, but at the moment we don’t have a plan to use them.”

The committee voted unanimously to keep its asset purchase target at 745 billion pounds ($980 billion) while holding the benchmark interest rate at a record-low 0.1%. The pace of bond purchases will be slowed to 4.4 billion pounds a week from Aug. 11.

Still, the MPC “does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating” economic slack and “achieving the 2% inflation target sustainably,” it said.

The updated projections see inflation getting back to the 2% target within its forecast horizon, which could suggest it currently doesn’t see a need to ease further. The new guidance on the path of policy could be an attempt to offset any investor concern that it’ll tighten too soon.

Officials said the downturn will be less severe than outlined in a scenario it published in May, but added that the risk to the outlook is skewed to the downside, with gross domestic product not expected to exceed pre-virus levels until the end of 2021.

What Bloomberg’s Economists Say

“The Bank of England delivered a surprisingly upbeat message at its August meeting. We still think its likely the central bank’s forecasts will prove too optimistic and more stimulus will be on the cards later in the year.”

-Dan Hanson. Read his BOE REACT

That outlook meshes with the views of policy maker Silvana Tenreyro, who has said the sharp bounceback so far could flatten out toward the end of the year.

BOE Chief Economist Andy Haldane -- who voted against the last increase in quantitative easing in June -- has been slightly more optimistic about a quick recovery, saying last month that it’s proved to be V-shaped so far.

In the shorter term, inflation is expected to fall further below the target and average around 0.25% in the latter part of the year, before returning in about two years.

Policy makers expect unemployment to rise materially to about 7.5% by the end of the year. That’ll be accompanied by an increase in inactivity of about 400,000 people relative to before the crisis.

Most officials agree that the labor market will be key to the recovery. Economists are warning more than 3 million could be out of work before the end of 2020. That would be the worst since the de-industrialization of Britain under Margaret Thatcher in the 1980s.

“The Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”

--Bank of England August Policy Decision

Consistent with the government’s stated policy aims, the BOE’s forecasts don’t include a second nationwide lockdown, but do assume a slow recovery with the possibility of more restrictions.

“In our view, economic developments will very likely fall short of this near-perfect scenario and inflationary pressure will remain subdued for longer than the BOE currently expects,” said Kallum Pickering, a senior economist at Berenberg. “As a result, policy makers may eventually need to do more to support the recovery.”

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