- BoE rate decision & minutes due 18th March 2021 at 12:00GMT/08:00EDT
- Base Rate and APF set to be held at 0.1% and GBP 895bln respectively
- Policymakers are likely to highlight the improving, albeit somewhat uncertain outlook for the UK economy
OVERALL
The MPC is set to hold the Base Rate at 0.1% and its asset purchase facility at GBP 895bln via unanimous votes. The upcoming meeting takes place against the backdrop of a successful vaccine rollout in the UK, further budgetary support and a roadmap for reopening the economy. This will provide policymakers with the confidence that no further easing is required at this stage, whilst highlighting that the recent rise in market rates is deemed to be consistent with changes in the economic outlook. The prospect of negative interest rates has been taken off the table for the time being, however, work is still ongoing at the Bank on how they could be implemented in a future crisis.
PRIOR MEETING
As expected, the BoE held the Base Rate at 0.1% and its asset purchase facility at GBP 895bln via unanimous votes. Focus for the release was largely centred around commentary on the Bank’s preparedness and willingness for a future venture into NIRP. The key passage from the statement read: “the committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future.” As such, the main takeaway was that negative interest rates could be an option for the MPC in a future crisis, but it will not be something that market participants should be expecting to see during the current one. At the follow-up press conference, Governor Bailey stressed that market participants should not view the Bank’s toolbox as indicative of future moves. The accompanying projections within the MPR, revealed that policymakers expect the UK economy to return to pre-pandemic levels by the end of the year.
RECENT DATA
January M/M GDP saw a contraction of 2.9% amid the imposition of the most recent national lockdown. This outturn was not as bad as the feared -4.9%, however, it is worth noting that the headline was boosted by the test and trace scheme and vaccine programmes, which added 0.9%. Timelier PMI data showed a pick-up in the February services reading to 49.5 from 39.5 (still in contractionary territory), whilst the manufacturing print remained north of the expansion mark at 55.1 vs. prev. 54.1, leaving the composite at 49.6 vs. prev. 41.2. As the economy reopens, the differential between the services and manufacturing metrics will likely narrow. On the inflation front, Y/Y CPI for January rose to 0.7% from 0.6% with the core reading holding steady at 1.4%. Guidance from the MPC notes that "CPI inflation is expected to rise quite sharply towards the 2% target in the spring, as the reduction in VAT for certain services comes to an end and given developments in energy prices."
RATES
The Base Rate is unanimously expected to be held at 0.1% with the prospect of negative rates no longer a live issue at the BoE for the current cycle. Note, technical work on the potential future usage of negative rates is still ongoing but isn't set to be completed for several months. Current market pricing is relatively benign for 2021.
RHETORIC
Recent remarks from Governor Bailey stated that he is more positive but with a large dose of caution on the recovery, reiterating the MPC view that the economy is expected to return to pre-pandemic levels by around year-end. With this in mind, Bailey noted that the recent rise in market rates is deemed to be consistent with changes in the economic outlook; a view supported by Deputy Governor Ramsden. Despite the optimistic outlook, the Governor was keen to stress that the MPC is not out of policy tools and could introduce new tools. Deputy Governor Broadbent has downplayed the inflationary pressures in the economy by stating that "the longer-standing surveys from several sources do not point to an expectation, on average, that inflation will exceed the target". Conversely, Chief Economist Haldane suggests that “risks to inflation in the UK are skewed to the upside, rather than being balanced”. External member Haskel cautioned that he “sees relatively little risk of sustained above-target inflation over this period”. Tenreyro has continued to talk up the benefits of NIRP, however, as above this is not a live issue for the upcoming meeting.
QE
The MPC is expected to hold the Gilt remit steady at GBP 895bln (GBP 875bln Gilts, GBP 20bln corporates). From an operational perspective, given that purchases are set to run until the end of the year, UBS expects (as hinted by Governor Bailey on February 24th) policymakers to slow the pace of weekly Gilt purchases in August from GBP 4.44bln to GBP 2.75bln. Beyond December, UBS expects the Gilt remit to remain at GBP 895bln.