BOE to Counter Double-Dip Contraction Risk With Fresh Stimulus

The Bank of England looks certain to fire another burst of monetary stimulus this week as new coronavirus lockdowns leave the economy facing a third quarter of decline in 2020.

Any doubt that Governor Andrew Bailey and his colleagues might delay boosting their bond-buying program when they meet this week was effectively erased with Prime Minister Boris Johnson’s announcement of a month long closure of non-essential shops and hospitality venues in England.

BOE to Counter Double-Dip Contraction Risk With Fresh Stimulus

That’s changed the outlook for the last three months of the year, forcing several economists to revise their forecasts. Output fell in the first half before starting to recover, though the BOE estimates it was still about 10% below its 2019 level at the end of the third quarter.

In a survey last week, analysts predicted the BOE will increase quantitative easing by 100 billion pounds ($129 billion) to 845 billion pounds. That’s almost double the level at the start of the year, and would be the fourth round of monetary easing since the crisis started.

The decision is scheduled to be published alongside updated economic forecasts at midday on Thursday, the same day the new lockdown for England kicks in. The QE boost could now be bigger than expected, and an earlier announcement can’t be ruled out.

“They’ll undoubtedly be ready to do what’s needed this week,” said James Rossiter, an economist at TD Securities who used to work at the central bank, and who predicts a 120 billion-pound increase.

The central bank faces a communications challenge, though, as much of its Monetary Policy Report will already have been written, assuming milder restrictions with a lockdown as a secondary scenario. “There will be some very last-minute rewriting of the document, to say the least,” Rossiter said.

What Bloomberg Economics Says...

“Clearly there’s a significant risk that the restrictions stay in place for longer than a month. It’s also possible that there’s a more significant hit to confidence and, in turn, demand from the second lockdown.”

-- Dan Hanson, U.K. economist

For the full report, click here

U.K. bonds rose on expectations of more easing, outperforming German bunds.

JPMorgan Chase economist Allan Monks revised his forecast in the wake of the lockdown announcement. He now agrees with the consensus on quantitative easing, up from 75 billion pounds previously, and predicts officials will increase their weekly purchase rate.

“An argument can be made for an even bigger extension this week,” he said, although he expects officials may instead choose to wait until the first quarter of 2021 before boosting buying again.

The latest lockdown isn’t expected to hit the economy as severely as the first one earlier this year. That caused a 20% contraction in output in the second quarter, for the worst recession in more than three centuries.

This four-week period of restrictions could knock 5% off gross domestic product this quarter, according to Simon French, chief economist at Panmure Gordon & Co. and a former chief of staff to the U.K. Cabinet Office.

Berenberg’s Kallum Pickering is forecasting a 5.5% contraction, compared with stagnation before the measures were introduced, while JPMorgan’s Monks predicts a smaller hit of 1.5%, citing the less stringent curbs and the fact the economy is still running well below its previous size.

BOE officials will give their own updated projections on Thursday, while the new lockdown could also bolster talk of negative interest rates -- a topic the central bank is discussing but which economists in the survey didn’t see as imminent.

“It ramps up the pressure somewhat on the skeptics of negative rates to reconsider, and increases the probability they will go there,” said Tony Yates, an economics lecturer and former BOE official.

The stay-at-home order -- which the government has acknowledged could be extended -- comes at an especially tough time for the U.K. A Dec. 31 deadline to agree a trade deal with the European Union is fast approaching, causing extra uncertainty and the prospect of tariffs on imports from next year.

Even before the new lockdown, economists expected the BOE to slash its growth outlook for this year and next on Thursday. A number of policy makers had already signaled they were ready to add more stimulus.

“The risk is that they could up the weekly pace of QE which would then require a larger envelope than the 100 billion pounds we are forecasting if they want to continue purchases for a decent length of time,” said George Buckley, chief U.K. economist at Nomura International Plc.

Debt Burden

Bond purchases, the BOE’s preferred tool so far, have almost exactly matched the massive increase in government borrowing needed to fund Chancellor of the Exchequer Rishi Sunak’s crisis response.

Debt levels are now set to rise further, with Johnson saying the government will extend its furlough plan, which had been due to finish on Oct. 31. A replacement program, which was due to kick in on Nov. 1, was mainly designed to encourage part-time work in an economic recovery.

The new strategy means furloughed workers will get as much as 80% of their wages through the lockdown. The government will take on the full burden of that support, which for the last month had included a contribution of up to 20% from businesses.

©2020 Bloomberg L.P.

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