BOE Watchers Focus on Outlook for U.K. Recovery
(Bloomberg) -- The Bank of England is likely to emphasize its high bar for tightening monetary policy, a move to tamp down speculation that a quick recovery will force policy makers to push U.K. borrowing costs higher.
With no change expected in interest rates or the pace of stimulus, analysts are focusing on the tone and the outlook from the central bank in a statement that officials are due to release at 12 p.m. in London on Thursday.
Governor Andrew Bailey is attempting to balance a brightening outlook for the economy, led by a world-leading Covid-19 vaccination program, against a near certain contraction in the first quarter and a likely increase in unemployment. Britain also is benefiting from a sunnier outlook in the U.S. and an annual budget at home that extended benefits for those out of work due to lockdowns.
“There’s been more good news since the BOE’s February meeting, including the U.S. stimulus -- which is huge -- and the budget,” said Elizabeth Martins, senior economist at HSBC Holdings Plc.
The nine-member Monetary Policy Committee is expected to vote unanimously to keep their benchmark interest rate at a record low 0.1% and the asset-purchase target at 895 billion pounds ($1.2 trillion), according to a survey of economists by Bloomberg. There’s a number of other factors influencing the bank.
Bond yields are rising worldwide. The European Central Bank responded last week with a pledge to accelerate the pace of its asset purchases. BOE policy makers show little inclination to follow suit. On Monday, Bailey said that although the central bank was watching markets very carefully, he did not see cause for worry.
The U.S. Federal Reserve last night continued to project near-zero interest rates through at least 2023. They upgraded their economic outlook to reflect greater optimism over the U.S. recovery.
The BOE is currently buying 4.4 billion pounds a week under its asset purchase program valued at 150 billion pounds this year. The MPC may opt to remind markets that it can shift the pace of those purchases at any time if it sees an unwarranted tightening in financial conditions.
What Our Economists Say...
“There’s a possibility that the recent increase in yields prompts the BOE to raise purchases, like the ECB. But we see the likelihood of this as low. For now, the aim will be to avoid sending any signal that gives yields a reason to advance further.”
--Dan Hanson, Bloomberg Economics. Click for the full REACT.
The U.K. has enjoyed good news on the economic front. While output is set to contract in the first quarter, it shrank less than expected during a coronavirus lockdown in January. The BOE expects a rapid rebound to pre-Covid levels over the rest of 2021. In February, it described risks to that outlook as tilted to the downside.
At the time of the last decision, the bank said it “does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”
Inflation is about to surge after remaining well below the BOE’s 2% target for 1 1/2 years. Although economists expect it climb near the goal in 2021, that will mostly be driven by temporary factors such as energy prices that the BOE has indicated it can overlook.
Only the central bank’s Chief Economist Andy Haldane has warned about inflation, saying a “tiger has been stirred” that may “prove difficult to tame.”
Unemployment could keep price growth contained. Since the BOE’s last forecasts, Chancellor of the Exchequer Rishi Sunak extended furlough payments to those prevented from working as part of a raft of budget pledges, and Prime Minister Boris Johnson has outlined the U.K.’s path out of lockdown. Those factors could reduce the peak level of joblessness.
“Things have got better,” said Jacob Nell, chief U.K. economist at Morgan Stanley. “January GDP was upbeat, we had a fiscal easing in the budget, and the vaccine roll-out continues to go great guns. They had a pretty upbeat forecast in February, and they’ll want to wait until May when they do their numbers again before they give a clear signal.”
Household savings accumulated rapidly over the past year with consumers prevented from going on holiday, shopping in stores or eating in restaurants for long periods since the start of the pandemic. How much money they have and their willingness to spend is one of the prime issues guiding the outlook. The bank’s official assumption is that 5% of the cash will be unleashed, but Bailey admits that’s a “fairly cautious” view.
Haldane has publicly said that the amount could be far larger, with the economy “poised like a coiled spring” for potentially double-digit growth in a year. While less bombastic, Gertjan Vlighe has said that the range of possible consumer behavior is wide, and even small changes in what happens to this pool of savings could have a large impact.
©2021 Bloomberg L.P.