BoE Preview: Raising Stock To Sustain The Flow
(4 min read)
The prevailing state of the UK economy is unrecognisable relative to the BoE’s last monetary policy report in January. Substantial downgrades are unavoidable, but so is the uncertainty around it.
Damaged balance sheets will prevent a full and rapid recovery, supporting ongoing stimulus. With little hope for imminent normalisation and serious downside risks from secondary shutdowns, I expect the BoE to sustain its asset purchase pace.
A slower pace of purchase would be needed to avoid hitting the current target stock before August. As that is undesirable amid sustained heavy gilt issuance, I expect the BoE to announce a £55bn increase to £700bn, with little point waiting.
Updated BoE Projections Will be Significantly Revised
When the BoE published its Monetary Policy Report (MPR) on 30 January, Covid-19 was still a distant affliction that had no bearing on its forecast. Committee members appeared to treat it as potentially like SARS with no direct policy impact, and in fairness, my forecasts were in a similar state. Less than six weeks later, the BoE delivered its first emergency rate cut before moving to the lower bound and launching QE the following week. Precautionary distancing was destroying demand ahead of an unprecedented lockdown that has since smashed the economy.
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