COVID | Monetary Policy & Inflation | UK
The BoE’s ongoing easing programme means it need not announce any policy change at this meeting. However, with insufficient room to continue purchases into 2021, November 2020 is a ‘live’ meeting, which the Monetary Policy Committee (MPC) is likely to warm up toward.
Renewed lockdown restrictions, Brexit risk, and low vacancies probably disappoint the MPC. Together with the disinflationary effect of GBP appreciation, the 2yr forward trade-off turns conventionally dovish, justifying more QE soon, in my view.
No Change in Policy, for Now
The BoE MPC will announce its latest policy decision at noon on 17 September, and a ‘no change’ outcome is the unanimous modal expectation of contributors to the consensus. That also applies to the vote split, where no dissenters are anticipated. With the current purchase programme comfortably able to extend until after the November Monetary Policy Report, there is no pressing need to change policy yet. However, without enough space to extend the QE programme into 2021, the commentary around the September meeting must be mindful of the potential need to change policy at the November meeting. Although the MPC disappointed dovish expectations in August with an early taper to its asset purchase pace, I do not see that as the start of a relatively hawkish trend. The MPC was optimistic about the economic recovery, but subsequent comments from a few MPC members suggest that they have already cooled on that outlook. As the forecast changes, both through the central scenario and the risks, the optimal policy response does too.
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- The BoE’s ongoing easing programme means it need not announce any policy change at this meeting. However, with insufficient room to continue purchases into 2021, November 2020 is a ‘live’ meeting, which the Monetary Policy Committee (MPC) is likely to warm up toward.
- Renewed lockdown restrictions, Brexit risk, and low vacancies probably disappoint the MPC. Together with the disinflationary effect of GBP appreciation, the 2yr forward trade-off turns conventionally dovish, justifying more QE soon, in my view.
No Change in Policy, for Now
The BoE MPC will announce its latest policy decision at noon on 17 September, and a ‘no change’ outcome is the unanimous modal expectation of contributors to the consensus. That also applies to the vote split, where no dissenters are anticipated. With the current purchase programme comfortably able to extend until after the November Monetary Policy Report, there is no pressing need to change policy yet. However, without enough space to extend the QE programme into 2021, the commentary around the September meeting must be mindful of the potential need to change policy at the November meeting. Although the MPC disappointed dovish expectations in August with an early taper to its asset purchase pace, I do not see that as the start of a relatively hawkish trend. The MPC was optimistic about the economic recovery, but subsequent comments from a few MPC members suggest that they have already cooled on that outlook. As the forecast changes, both through the central scenario and the risks, the optimal policy response does too.
Concerns for the Outlook: Unemployment, Lockdown, and Brexit
Since the August forecast round, much of the output and expenditure data has not obviously been significantly wide of expectations, especially given the substantial uncertainty around them. However, there are a few developments that are likely to weigh on the MPC’s outlook.
From the coincident data, the absence of a rebound in vacancies bodes ill for the prospects of people leaving furlough for unemployment soon.
The news about Covid, and crucially the government’s response to it, is also concerning for the outlook. An early re-imposition of lockdown restrictions has already moved from just targeted regions and quarantine to the national level, with a six-person cap on the number of people permitted to meet socially. It appears that the government intends to apply a similar playbook this winter for as long as a vaccine is unavailable, albeit while stopping short of school closures. Such restrictions are probably worse than factored into the central projections. Meanwhile, the ongoing absence of a vaccine keeps pushing back that upside tail, lowering the distribution and mean in the process.
Finally, Brexit is back with a vengeance, and although it would not impact forecasts while the policy is still for a deal, the risk will likely weigh on MPC deliberations.
BoE’s 2yr Forward Trade-Off Turning Dovish
As ever, these dovish developments need to be viewed relative to the starting policy biases. The MPC forecast in August that inflation would be marginally below target in 2yrs, with a sizeable margin of excess demand arguably making it an intolerable forecast combination in the hawkish direction (Chart 1). However, the MPC has been forecasting excesses in both demand and inflation since February 2018, and it is still mostly looking through that amid uncertainty about whether the key assumptions would materialise. A mechanical update of that forecast using market movements would kick the combination back inside the so-called lambda cone by lowering inflation another 10bps (Chart 2). As confidence in the excess demand leg will probably be much lower than the MPC’s confidence in the soft inflation side, I see this combination as more dovish than its notionally tolerable position might imply.
Bottom Line
Overall, I expect the MPC will want to leave the door open to announcing further stimulus in November, where I still forecast an increase in the target stock to £800bn. Some further discussion of the downside developments acknowledged in recent speeches would do that, even without going as far as Michael Saunders’ more explicit statement about easing.
Phil Rush is the Founder and Chief Economist at Heteronomics, an independent macroeconomic research consultancy specialising in the UK economy. Prior to this, Phil spent 10 years on the sell-side, with his previous role being at Nomura as a Senior European Economist.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)