- The EY ITEM Club believes it is unlikely that the Bank of England will announce any further stimulus action after the May Monetary Policy Committee (MPC) meeting.
- The Bank of England is likely to indicate that it is in “wait and see” mode as the substantial stimulus that it announced in March is still being enacted, notably the buying of £200 billion of government and corporate bonds (taking the total up to £645 billion). Meanwhile, the gilt market is currently relatively calm. The Bank of England has also taken interest rates down to a record low of 0.10%.
- There will be significant interest in the new Bank of England GDP growth forecasts, detailed in the Monetary Policy Report. The expectation around how much the Bank believes GDP will contract in the near-term alongside the anticipated pace of recovery will provide insights around whether further monetary stimulus is likely to be needed.
- We believe future Bank of England stimulus is possible, potentially on 18 June after the next MPC meeting given that the £200 billion QE that it announced in March is likely to be used up by the end of June or early July.
- This would most likely be in the form of more asset purchases. With the Treasury issuing a large amount of gilts (it announced on 23 April, it would issue £180 billion between May and July), the Bank of England may want to give the markets the confidence that they can be digested.
- The Bank of England has taken interest rates down to a record low of 0.10%, and it seems unlikely that it will lower it further. The Bank has regularly indicated that it sees the lower bound for interest rates as being as close to zero as is possible.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
The Bank of England looks unlikely to deliver any further stimulus on Thursday after its May meeting of the MPC. Indeed, we expect a 9-0 unanimous vote within the MPC for both unchanged interest rates and asset purchases. However, it is highly likely that the MPC will make clear that it is ready and willing to take further stimulative action should economic circumstances or financial market conditions warrant.
The Bank of England delivered major monetary stimulus during March in emergency actions on 11th (timed to combine with the Budget) and on the 19th. This most notably included taking interest rates down from 0.75% to 0.25% and then to a record low of 0.10% and announcing that it would buy a further £200 billion of government and corporate bonds, taking the total up to £645 billion. The majority of this will be through the purchase of gilts. This was by far the largest single announcement of asset purchases that the Bank of England has ever announced (the previous highest was £75 billion when the Bank of England last undertook QE in August 2016 in the aftermath of the UK voting to leave the EU). The Bank of England also stated its intention to front-load these purchases, as much as was operationally possible, as this was seen as increasing the effectiveness of the policy in counteracting an unwarranted tightening of monetary and financial conditions.
The minutes of the 25 March MPC meeting had made it clear that the committee is ready and willing to take further supportive measures should circumstances warrant. The 25 March minutes observed that, given the major recent steps taken by the Bank of England, there was “not a strong case for further policy changes at this meeting”. It noted that gilt yields had fallen significantly following the previous week’s special MPC meeting and the commencement of additional gilt purchase operations from 20 March. It commented that “if needed, the MPC could expand asset purchases further”. The minutes concluded that the MPC would continue to monitor the situation closely and, consistent with its remit, stood ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy.
Significant attention will be focused on the new Bank of England forecasts for GDP, contained in the quarterly Monetary Policy Report that will be released on Thursday along with the MPC’s decision and minutes of the meeting. This could indicate whether or not the MPC thinks that further monetary stimulus is likely to be needed.
Recent statements from MPC members indicate that they are cautious over the economic outlook. Bank of England Governor Andrew Bailey observed that the Office for Budget Responsibility’s plausible scenario that GDP could contract by 35% quarter-on-quarter in the second quarter if the lockdown lasted through to the end of June “was not implausible”. Additionally, some other members of the committee have voiced uncertainties over whether the economy will see a rapid rebound from its current slump. In particular, there are concerns that consumer caution may persist even after the lockdown is lifted.
If this is the case, consumer price inflation (which the EY ITEM Club suspects will go as low as 0.5% over the summer) is likely to undershoot the Bank of England’s 2.0% target rate for a longer period, reinforcing the case for further monetary stimulus.
The Bank of England’s new forecast will also indicate how much it believes the economy is likely to suffer longer term as a result of the Covid-19 impact.