MNI REVIEW: BOE Boosts QE More Than Expected, May Vary Pace
By David Robinson
The Bank of England boosted its gilt purchases by a greater-than-expected GBP150 billion to a total GBP895 billion by the end of 2021 as it downgraded its economic outlook, and said it could slow purchases later or step up their pace “should market functioning worsen materially.”
If the inflation outlook weakens, the Bank would “take whatever additional action was necessary to achieve its remit,” it said, in a new line added to its guidance after the Monetary Policy Committee’s unanimous QE vote.
The Bank, which left Bank Rate at 0.1%, is continuing its consultation on the practical consequences of
cutting interest rates below zero, but Governor Andrew Bailey said the BOE’s choice of policy tools would not follow a set order but rather depend on circumstances.
The rate curve in the Monetary Policy Report which shows Bank Rate going negative and projects inflation to be 2% in two years’ time, was an assumption based on market pricing and used for forecasts and not a steer on the BOE’s likely policy moves, Bailey said.
GILT ISSUANCE
Extending QE would alter the shape of the yield curve and add to the stock of safe assets, the governor said, though he acknowledged evidence that bond purchases may be more powerful in financial crises. There was no direct link between the
QE expansion and gilt issuance, he said, speaking hours before the government was due to announce expensive new fiscal support for the economy.
“We do not set a level of asset purchases related to what the government is going to borrow,” Bailey said.
The Bank expects fourth quarter GDP to decline by 2.0% quarter-on-quarter and it raised its estimate of the jobless peak to 7.75% from 7.5%, though it sees the impact of November’s new, month-long Covid lockdown as likely to be proportionately less severe than that of the earlier three-month shutdown. Businesses now have more experience operating in a lockdown and schools and manufacturing are set to stay open this time, noted Deputy Governor Ben Broadbent.
The BOE factored in an upcoming hit from Brexit, which it said would knock 1 percentage point off Q1 GDP if a thin, Canadian-style trade deal is struck with the EU. Some exporters and importers, an estimated 30% of firms, may be unprepared for the change in trading regimes, it said.
In the absence of a deal, “the exchange rate would probably fall and, relative to the projections in the November Report, CPI inflation was likely to be higher and GDP growth weaker,” the Bank said.
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