The Bank of England (BoE) made no changes to monetary policy at its March meeting, keeping its Bank Rate at 0.10% and leaving its overall size of quantitative easing (QE) at GBP895 billion.
The BoE observed the near-term outlook for the UK had improved since its last meeting in February owing to faster vaccinations and the government’s annual budget this month.
‘The rates of Covid infections and hospitalisations have fallen markedly across the United Kingdom and the vaccination programme is proceeding at a rapid pace … Budget 2021, published in March, contained a number of significant new policy announcements, including the extension of the Coronavirus Job Retention Scheme and other measures to support the economy in the near term.’
But the central bank decided to make no changes to monetary policy because the medium-term outlook remains uncertain.
‘The outlook for the economy, and particularly the relative movement in demand and supply during the recovery from the pandemic, remains unusually uncertain. It continues to depend on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments.’
Thus, the BoE continues to keep its Bank Rate at all-time lows of 0.10% as the chart above shows.
Unemployment & Inflation, UK
Source: Bank of Singapore, Bloomberg
Unemployment is set to rise from current levels of 5.1% as the government’s job retention scheme ends in September. In addition, inflation is still well below the BoE’s 2% target at 0.7% currently. Therefore, the central bank signaled interest rate hikes are still unlikely for the next couple of years.
‘The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.’
But the economy’s recovery from the pandemic will make it unlikely now for the BoE to extend QE when its current round of bond buying finishes at the end of 2021. Thus, the central bank has to decide over the next few months when it will begin tapering its QE - from around GBP18 billion a month at present - to ensure it doesn’t abruptly end its bond buying before the end of the year.
We expect the BoE is likely to be the first major central bank to announce tapering this year, most likely in Q2’21, though it could wait until as late as August. Significantly, the BoE - like the Federal Reserve and, in contrast, to the European Central Bank and Reserve Bank of Australia - is not pushing back against this year’s rise in bond yields, noting ‘UK financial conditions has been broadly unchanged.’
Tapering QE would cause UK gilt yields to rise, benefiting the GBP. We see the currency reaching 1.44 over the next year against the USD.
