BoE Call: Looking for QE increase of £150bn and overall ultra-accommodative message
Head of Macro Analysis
Summary: We are onside with consensus in expecting a significant increase in the BoE's QE to mitigate the negative effects of the pandemic and Brexit uncertainty. Our baseline scenario is an increase of GBP 150bn which would push the total stimulus package to about GBP 795bn. The overaching message should remain ultra-accommodative with potential reference to negative rates if conditions require further support.
BoE Preview : Following the unprecedented 20.4% contraction in GDP in April and downside risks weighting on the economy due to the pandemic and Brexit uncertainty, the Bank of England is likely to unleash more firepower to support the economy on Thursday. QE increase was already on the table at the latest MPC meeting with two members – J. Haskel and M. Saunders – voting in favor of an increase of £100bn. Since the beginning of the crisis, the Bank of England’s strategy consists in absorbing more public debt than the Treasury is selling in order to allow the private sector to reduce its holdings of gilts. If it wants to continue this strategy and sustain the current pace of gilt purchases, we estimate that the central bank will need to increase the QE package by £150bn this week. The new stimulus would last at least until September or even November in case the Bank of England decides to slow purchases if market conditions improve significantly.
Market focus will be on what policymakers have to say about negative rates. In one of its latest speech, the governor Andrew Bailey has not ruled out this policy. In our view, it is however unlikely to materialize any time soon due to the detrimental impact of negative rates on banks and lenders’ margins. Implementing them now would be the worst time ever for the banking and financial sector which faces already a very challenging period due to Brexit uncertainty and the threat of bad loans.
We think a more promising policy response would be to implement yield curve control, as was done by the Bank of Japan and the Federal Reserve (from 1942 to 1951). Along with a clear and well-crafted communication strategy, the Bank of England could avoid interest rates from increasing too much when the recovery will start to materialize. It would allow the government to keep borrowing at low cost on the market as much as necessary to boost aggregate demand. The easiest strategy consists in keeping the 10-year yields within a certain range, let’s say between 0% and 0.10%, but other options exist such as targeting interest rates only in the short portion of the yield curve (e.g. up to two years) or beginning at the short end of the yield curve and moving out in steps as needed.
Rate expectations : Unchanged at 0.1% - the lowest historical level.
Possible QE tweak expectations : QE increase of £150bn – total stimulus package expected to reach £795bn.
Latest BoE projections:
· GDP : -25% (Q2 2020), -14% (2020), +15% (2021).
· UK GDP is expected to recover its pre-COVID peak in the second half of next year.
· Unemployment: 9% (Q2 2020).
· Inflation: 0,6% (2020), 0,5% (2021).
· 2020 GDP: -11,5% (single pandemic peak), -14% (second pandemic peak).
· 2021 GDP: +9%.
· 2020 GDP: -6.5%.
· 2021 GDP: +4%.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)