- BoE rate decision, minutes & MPR due 6th May 2021 at 12:00BST/07:00EDT. Press conference due at 13:00BST/08:00EDT
- Base Rate and APF set to be held at 0.1% and GBP 895bln respectively
- Focus for the release will likely fall on any scaling back in weekly Gilt purchases
OVERVIEW
The BoE is expected to keep rates and the APF unchanged at 0.1% and GBP 895bln (GBP 875bln Gilts and GBP 20bln corporates) respectively. The meeting takes place against the backdrop of a successful vaccination campaign, reopening of the UK economy and encouraging domestic data. Focus will fall on whether the MPC opts to slow weekly Gilt purchases from the current rate of GBP 4.4bln a week to allow purchases to run until the end of the year (as has been signalled). Accompanying MPR projections are set to see an upgrade to 2021 GDP with little in the way of material changes expected to the inflation outlook.
PRIOR MEETING
The MPC left the Base Rate and its asset purchase facility unchanged via unanimous votes, as expected. The meeting took place against the backdrop of a successful vaccine rollout in the UK, further budgetary support and a roadmap for reopening the economy.
The March statement noted “the news in recent plans for the easing of restrictions on activity may be consistent with a slightly stronger outlook for consumption growth in 2021 Q2 than was anticipated in the February Report”. However, policymakers suggested that it is less clear that this represents news to the MPC’s medium-term forecast.
The MPC's expectations remained that the pace of asset purchases will slow towards the end of the year before concluding in December. CPI inflation is expected to return towards the 2% target in the spring, and conditioned on the market path for interest rates, is projected to be close to 2% over the second and third years of the forecast period. However, the MPC continued to note that tightening will not take place until there is good progress on inflation.
RECENT DATA
The most recent monthly GDP print for February revealed growth of just 0.4%, however, showed the adaptivity of the UK economy to lockdown conditions; looking ahead, ING expects a 5% expansion in Q2 as the economy reopens.
Survey data reflects the upbeat outlook for the economy with the April PMI report showing the services sector rising to 60.1 from 56.3 as Markit noted that companies are reporting a surge in demand for both goods and services.
From an inflation perspective, Y/Y CPI remained lacklustre at just 0.7% in March, however, base effects from 2020 are set to see the metric rise above 2.0% in the coming months; an outcome that will be attributed to ‘transitory’ factors. On the jobs front, the unemployment rate in the three months to February slipped further to 4.9% from 5.0%, albeit is expected to rise later in the year as the furlough scheme is unwound.
RATES
The Base Rate is set to be held at 0.1% via a unanimous decision. Markets have priced in just 0.64bps of tightening by year-end, with a full 25bps not priced until the end of the Reuters Dec-2022 forecast horizon. Rate hikes are still some way off, but 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.
Credit Suisse (SIX:CSGN) notes that a definite conclusion to the Bank's tightening sequencing is unlikely at this stage, however it will be important to monitor over the coming months.
RHETORIC
Commentary from the MPC has been relatively sparse since the prior meeting. However, in terms of those who have spoken, external member Saunders noted that the "MPC central forecasts may have been 'overly optimistic' on the path for potential output in the year ahead". Tenreyro also struck a relatively cautious tone noting that "there remains a number of scenarios that she would anticipate that requires looser policy this year".
On a more optimistic footing, Chief Economist Haldane says he senses that the economic recovery will come quickly and stated that people are desperate to get out and spend, adding that a rip-roaring recovery is possible if UK savings are spent. As such, HSBC notes that their “sense is that the divide between more cautious external members and their more bullish internal colleagues persists.”
The dynamic on the MPC will come into greater focus over the coming months as Chief Economist Haldane and external member Vlieghe leave the Bank in June and August respectively.
QE
The Asset Purchase Facility is expected to remain at GBP 895bln (GBP 875bln Gilts and GBP 20bln corporates) via a unanimous decision. Alongside the decision itself, participants will be eyeing the accompanying market notice outlining the upcoming pace of asset purchases under its APF.
As it stands, Credit Suisse notes that GBP 79bln of net purchases are still required for the MPC to reach its GBP 895bln target by the end of the year; on a gross basis (when including reinvestments), this figure reaches GBP 112bln of purchases remaining. To prolong purchases until the end of the year, the weekly purchase pace would need to drop from GBP 4.4bln to GBP 3bln a week.
An announcement this week would avoid a more drastic curtailing later down the road. Given that the MPC has already flagged that it will need to slow down the pace of purchases for them to stretch out until the end of the year, an adjustment on this front should not come as a huge surprise. However, many in the market will deem the intention to curtail purchases by the end of the year as a hawkish move.
FORECASTS
UBS expects the accompanying economic projections to reveal an upgrade to the 2021 GDP forecast from 5% to above 6% on account of "a somewhat faster-than-expected pace of easing in mobility restrictions, new policy announcements at the Spring Budget, including the extension of the furlough scheme, and the substantial US fiscal stimulus package". The Swiss Bank expects 2022 and 2023 projections to be left broadly unchanged at 7.25% and 1.25% respectively.
On the inflation front, forecasts are set to see little in the way of material changes with HSBC expecting a minor downgrade to the 2021 forecast to 1.7% from 1.9% with 2022 and 2023 left at 2.2% and 2.0% respectively.