Goldman, BofA See U.K.’s Perfect Storm Prompting More BOE Action
Wall Street economists are increasingly predicting the Bank of England will take further action to revive growth.
(Bloomberg) -- Wall Street economists are increasingly predicting the Bank of England will take further action to revive growth in coming months as the U.K. recovery from the coronavirus recession proves lackluster.
Economists at Goldman Sachs Group Inc. say policy makers may signal in August that interest rates could turn negative, while BofA Global Research expects them to cut the benchmark rate to zero from 0.1% as unemployment worsens and the inflation outlook weakens.
The Royal Bank of Canada says the central bank could be forced to take borrowing costs negative as early as November.
“The end of the year has the potential to become a perfect storm for the U.K. when risks of rising virus cases and the phasing out of labor market support coincide while Brexit becomes a tangible event,” RBC analysts including Peter Schaffrik and Cathal Kennedy said in a note. “The BOE will look for further stimulus measures and markets are likely to anticipate this.”
Bets on the BOE easing policy further are already picking up, with investors pricing in sub-zero rates by next spring. Money markets are pricing in a cut to zero in February.
Interest-rate futures tied to three-month sterling Libor -- the rate banks can borrow from each other -- are trading above 100, hinting at negative rates by September 2021. This funding rate is also below the BOE’s benchmark, a move that often precedes a rate cut.
The research follows a week of dim economic data, and an acknowledgment from policy maker Silvana Tenreyro on Wednesday that while activity will pick up from its historic, lockdown-induced plunge, it could then hit a ceiling. Businesses are already reeling and face additional burdens with Britain’s final split with the European Union at the end of the year.
Economists expect another 50 billion pounds ($63 billion) of bond purchases by the end of the year. There are signs that even that might not be enough.
While the labor market is holding up for now -- with more than 9 million employees being kept in employment on government wage subsidies -- the program will wind down by October. The country’s fiscal watchdog said this week that joblessness is likely to spike to the highest since Margaret Thatcher was prime minister.
Officials will provide updated forecasts for growth and inflation alongside their policy decision on Aug. 6. They may revise down their estimate for the so-called lower bound on bank rate to minus 0.5% in August, according to Goldman economist Adrian Paul.
Policy makers won’t push the benchmark that low “unless either fiscal stimulus is withdrawn prematurely, or a second adverse shock derails the post-virus recovery,” Paul said. “The fourth quarter is likely to be crucial.”
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