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%.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.