Central bank

Hawkish BoE, higher GBP

08 February 2021 • 3 mins read

  • The Bank of England (BoE) has become more hawkish, supporting our view that the UK outlook is at an important turning point.
  • First, the Monetary Policy Committee (MPC) voted unanimously to keep its Bank Rate at 0.10% and its quantitive easing unchanged. There was no votes for further easing.
  • Second, the BoE was bullish on the UK recovery after winter virus waves subside and, third, the MPC signalled it didn’t expect to use negative interest rates to boost the economy’s rebound.
  • Less risk of negative rates, the new EU-UK trade deal and rapid vaccinations all strengthen the outlook for UK assets. We see the GBP rising to 1.44 against the USD over the next year.

The Bank of England (BoE) has become more hawkish , supporting our view that the UK outlook is at an important turning point.

Monhtly GDP & Composite PMI, UK

Source: Bank of Singapore, Bloomberg

First, the Monetary Policy Committee voted 9-0 to keep the Bank Rate unchanged at 0.10% and the BoE’s quantitative easing also unchanged at GBP895 billion of total asset purchases. There were no dissenting votes for further easing. Second, the MPC was bullish on the UK recovery. The first chart shows growth remains well below its pre-pandemic levels owing to the current winter virus waves. But the BoE noted: ‘GDP is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination program is assumed to lead to an easing of Covid-related restrictions and people’s health concerns.’

Unemployment & Inflation, UK

Source: Bank of Singapore, Bloomberg

Third, the BoE said banks should spend the next six months preparing for negative interest rates in case the economy falters and the MPC votes to cut the Bank Rate below zero. But officials also said they do not expect use this option: ‘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.’ Thus, we expect no more interest rate cuts now with the Bank Rate already at record lows as the chart above shows.

UK Assets

Source: Bank of Singapore, Bloomberg

Less risk of negative interest rates, the new trade deal with the European Union and Britain’s rapid vaccinations all strengthen the outlook for UK assets. We see the GBP rising to 1.44 against the USD over the next year, a level it hasn’t reached since the 2016 referendum to leave the EU as the last chart shows.

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Author:
Mansoor Mohi-uddin
Chief Economist
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