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BoE said UK economy is rebounding ahead of schedule

Government borrowing costs hit a one-year high as markets repriced for recovery and inflation after the Bank of England said the economic rebound was ahead of schedule and kept monetary policy on hold yesterday.

Ten-year gilt yields rose 0.04 percentage points to 0.9 per cent after the Bank said that the news on near-term economic activity had been positive since last month. The break-even inflation rate, a market proxy for inflation expectations, rose to its highest level since early 2019.

The Bank of England expects inflation to return “swiftly” to the 2 per cent target but said it can see no sign of an underlying surge in prices. It shrugged off concerns about rising borrowing costs, saying that an aggregate measure of UK financial conditions had been broadly unchanged since February.

The assessment came in the minutes of this month’s monetary policy committee meeting, at which the nine members voted unanimously to hold rates at 0.1 per cent and leave the quantitative easing programme unchanged at £895 billion. It has £110 billion of the programme to complete by the end of the year.

The decision not to respond to higher gilt yields, which have risen fourfold this year, echoed the US Federal Reserve but stood in contrast to last week’s decision by the European Central Bank to step up the pace of quantitative easing. The ten-year gilt yield later slipped back to 0.875 per cent but remained at its highest level since last March.

The Bank made it clear that the economy is on track for a swifter rebound than it forecast last month but stopped short of announcing an upgrade. A full assessment will be in its May outlook.

The 2.9 per cent fall in GDP in January was “less weak than expected” and the government’s road map out of lockdown “envisaged that restrictions could be lifted somewhat more rapidly than had been assumed”.

Recent events were “consistent with a slightly stronger outlook for consumption growth in the second quarter than had been anticipated” and a “more moderate” rise in unemployment. The February forecast was for unemployment to peak at 7.75 per cent later this year and the economy to recover to its pre-crisis level by the start of 2022.

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Andrew Bailey, the governor, has signalled that the Bank is likely to move closer to the Office for Budget Responsibility’s forecast that unemployment will peak at 6.5 per cent.

The minutes added that Rishi Sunak’s £65 billion budget stimulus was a “material fiscal loosening in the near-term” while America’s $1.9 trillion stimulus was twice as large as expected and “ would have spillover effects for demand across the world, including in the UK”.

Andy Haldane, the chief economist, said: “As I’ve been saying for months . . . I do think more likely than not we are [set] for a rapid-fire recovery. That is coming, and I think that is coming soon.”

The committee was divided on whether the medium-term outlook for growth and inflation had changed. “Different MPC members placed different weights on the balance of risks around the outlook,” the minutes said.

The Bank of England reiterated that it would not change policy “at least until there was clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably”.

Martin Beck, UK economist at Oxford Economics, said: “The policy outlook continues to be one of inaction for the next few years.”

Source: Business Matters

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BoE economist predicts UK economy set to recover at rate of knots

The Bank of England’s chief economist expects Britain’s economy to begin to recover “at a rate of knots” from the second quarter of this year as vaccines against the coronavirus are deployed.

Andy Haldane said that the huge economic shock caused by the first lockdown in March and April last year, when output fell 25 per cent, was likely to prove more transient than the 2008-09 global financial crisis that generated a large overhang of bad debts.

“If we get the recovery that I expect to start coming on stream, probably at a rate of knots from the second quarter, that will hopefully . . . improve the prospects of re-employment,” Mr Haldane told an online event for students and alumni of Lady Margaret Hall, a University of Oxford college.

Many economists believe that Britain’s economy is on course to shrink during the current quarter as the government battles a new wave of the coronavirus with tougher lockdown measures. Mr Haldane played down the risk of a jump in unemployment after government furlough payments to companies are due to end in April.

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If the economy was within 5 to 10 per cent of its pre-pandemic size there should be no further job losses beyond the roughly one million people who had already lost work, he said. The last official data, for November, showed that output was 8.5 per cent below its pre-pandemic level.

The Bank has doubled its bond purchase target to £895 billion since the start of the pandemic, and Mr Haldane said he was concerned that many investors thought the central bank had done this primarily to finance government borrowing. He said the scale of bond purchases reflected the economic hit from the coronavirus outbreak and that he was committed to tightening monetary policy as required to meet the Bank’s 2 per cent inflation target.

Britain is distributing vaccines faster than almost anywhere else in the world and the government hopes to be able to ease restrictions significantly by Easter and to reduce costly economic support measures.

Source: Business Matters

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Will the BoE inject more stimulus into the UK economy?

The BoE is preparing to announce its latest interest rate decision tomorrow, as it closely monitors the UK economy’s rebound from the record 20.4 per cent contraction in the second quarter.

Since then, there have been many positive signs. The economy grew by a huge 8.7 per cent in June and another 6.6 per cent in July. More recently, Britons were enticed to the high street by August’s Eat Out to Help Out scheme.

But there are challenges on the horizon. First and foremost is the worrying rise in coronavirus cases and new restrictions. Inflation also fell to 0.2 per cent in August, well below the Bank’s two per cent target.

That’s a lot for the Bank of England to consider. And analysts are united in saying the BoE will leave interest rates on hold at 0.1 per cent and its bond-buying target at £745bn.

They say that the Bank is more likely to increase stimulus in November after seeing how the economy and inflation fare.

Further stimulus will wait until November

“Even if the Bank felt more loosening was ultimately going to be required, we see little benefit to the Bank announcing it now,” said George Buckley, chief UK economist at Nomura in a note to clients.

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Buckley pointed out that the Bank’s current bond-buying programme is scheduled to be completed around December. So, he said, “why not wait until the November meeting when the MPC [monetary policy committee] will have the luxury of analysing another seven weeks of economic data?”

Howard Archer, chief economic adviser to the EY Item Club, agreed. “There seems little need for further MPC stimulus action – for the time being at least,” he said.

“It currently looks very possible that GDP growth in the third quarter could be around 15 per cent following the record 20.4 per cent contraction in the second quarter.”

Analysts say that if the Bank decides to act in November, as many predict it will, it is likely to increase bond-buying rather than cut interest rates further.

Bank could take a ‘dovish turn’

In August, the Bank predicted economic growth would be better than expected in the near term. Yet it was more pessimistic longer-term, saying the economy would regain its pre-pandemic size at the end of 2021.

Its forecasts were more upbeat than most, however. Jacqui Douglas, chief European macro strategist at TD Securities, said in a note that the Bank therefore could well take a “dovish turn” tomorrow. She predicted there will be “more focus on the downside risks to growth going forward”.

Although the Bank is not publishing any new forecasts, it has tended to enlarge on its decisions in a statement.

Douglas said: “The downside risks to the outlook have come into sharper focus.” She cited “an upcoming wave of job losses to the challenge of controlling Covid outbreaks to Brexit negotiations”.

UK inflation also dropped to 0.2 per cent in August, dragged down by the Eat Out to Help Out discount meal scheme. But that was better than the Bank had expected.

Nomura’s Buckley said that there is a chance Jonathan Haskel or Michael Saunders could vote for more bond-buying during this meeting. They have traditionally been more dovish MPC members, and Saunders recently said it is “likely” more easing will be required.

What has the Bank of England done so far?

The Bank slashed interest rates to a record low of 0.1 per cent from 0.75 per cent in two special meetings in March.

It also beefed up its quantitative easing programme – through which it creates money and buys bonds to keep borrowing costs low – to £645bn in March. The Bank then increased its bond-buying target to £745bn in June.

The MPC has also put negative interest rates in its “toolbox” of possible measures for the first time.

However, at its August meeting it did not sound too keen to actually get them out and use them. It said that “negative policy rates at this time could be less effective as a tool to stimulate the economy”. The Bank added that “the MPC has other instruments available”.

By Harry Robertson

Source: City AM