Preview: BoE Policy Announcement

OVERVIEW

Policymakers are expected to stand pat on rates at 0.1% via a unanimous vote, whilst the decision to maintain the GBP 895bln APF remit (GBP 875bln Gilts and GBP 20bln corporates) will likely be subjected to dissent again from outgoing-Chief Economist Haldane who will vote in favour of a GBP 50bn reduction in the stock of Gilts. In the absence of policy tweaks or an accompanying MPR, the meeting will be used as more of an opportunity to take stock of the UK's economic performance as the economy reopens. As such, UBS expects the MPC to reaffirm its view that GDP is expected to rebound strongly in Q2 and, absent reintroduction of mobility restrictions, to recover to the pre-Covid level by the end of the year. If the UK economy continues to recover at its current trajectory, questions will be raised as to how the Bank intends to unwind its current level of stimulus. However, details on that front are likely to be relatively sparse during the upcoming meeting.

PRIOR MEETING

 As expected, the BoE stood pat on rates at 0.1% and held the APF remit at GBP 895bln (Haldane voted for a GBP 50bln reduction). The MPC opted to slow down the pace of its weekly gilt purchases to GBP 3.441bln/week from GBP 4.44bln. However, this came as little surprise to the market given that the prior GBP 4.4bln rate would not have stretched out until the end of the year; the point at which the MPC had already signalled that purchases will run until. In the accompanying MPR, the MPC noted that the economy is expected to experience a temporary period of strong GDP growth and modestly above-target CPI inflation, after which growth and inflation fall back, with inflation around the target two and three years ahead. Policymakers unveiled little news of note during the press conference with Governor Bailey rebuffing questioning on the MPC’s sequencing approach to tightening policy.

RECENT DATA

Since the prior meeting, headline Y/Y CPI has risen above target to 2.1%; an outcome that was telegraphed by the Bank at the prior meeting and attributed to transitory factors. April M/M GDP of 2.3% marked the fastest monthly pace of growth since July 2020 as the UK economy reopened. Timelier survey data for May saw the composite reading at 62.0 which was the fastest rate of expansion since records began in 1998. In the labour market, the unemployment rate resided at 4.7% in the three months to April with employment growth of 197k in May, according to flash estimates. As it stands, the Treasury has rejected calls from businesses to extend the furlough scheme (set to end in September) despite the government pushing back its final stage of reopening by four weeks. Overall, the impact of the delay is expected to be broadly insignificant for the UK economy. Retail sales for May declined from the notable pickup seen in April (bolstered by the reopening of in-store shopping) as the domestic consumer showed a preference for services that were shuttered in prior months.

RHETORIC

Governor Bailey recently noted inflation expectations remain well-anchored, whilst stating that employment data shows that a corner has been turned and if the MPC was to observe more general price pressures, the BoE would need to re-evaluate guidance. As it stands, Bailey is content with current policy settings. Deputy Governor Broadbent is of the view that a sustained return of inflation to target is required before accommodation is removed. Elsewhere, the housing market has been a topic of focus on the MPC with Deputy Governor Cunliffe noting that policymakers are very carefully watching house price inflation and Deputy Governor Ramsden echoing this sentiment. Ramsden also remarked that the Bank would not be complacent about inflation and could lift the Base Rate if inflation impulses are not temporary. Chief Economist Haldane (leaves the MPC after the upcoming meeting) has been typically hawkish in noting that the UK economy is going "gang-busters" and the BoE should be prepared to reduce stimulus. External member Vlieghe stated that should the transition out of furlough happen more smoothly, a somewhat earlier rate rise would be appropriate (term expires in August).

RATES

The Base Rate is set to be held at 0.1% via a unanimous decision. Markets have priced in just 1.5bps of tightening by year-end, with a full 25bps priced in by December 2022. In terms of house views, ING expects an eventual rate lift-off in Q1 2023, whilst acknowledging the possibility of an earlier hike if there is a more rapid than expected unwind in household savings or any temporary increases in wage growth prove to be more permanent. It is worth remembering that the BoE tasked staff at the Bank with reviewing its strategy on the sequencing of tightening in February. Previously, the MPC had guided towards not reducing its balance sheet until the Base Rate hit 1.5%. However, commentary from Governor Bailey has leaned towards reducing the balance sheet before lifting rates on the basis that doing so would give the MPC more scope to expand the balance sheet during a future crisis. The findings of this review are expected to be released at the August 5th meeting and will be crucial in shaping future expectations for policy at the Bank.

QE

In May, the MPC opted to slow down the pace of its weekly gilt buying to GBP 3.441bln/week from GBP 4.44bln (overall APF remit was left unchanged) with the view of concluding purchases towards the end of the year. The next review of the weekly operations is due at the August meeting, during which Rabobank anticipates a further slowing in the pace of purchases "as the MPC follows its glide path and tries to create a soft landing at the end of the year". The balance sheet remains the marginal tool of choice at the Bank, however, no changes are expected on this front at the upcoming meeting.