As expected, the Bank of England kept the policy rate unchanged today at 0.1% and the planned total government bond purchases is still £875bn. The vote on the latter was not unanimous though. Outgoing Chief Economist Andy Haldane voted to reduce the stock of asset purchases.
They still expect asset purchases to finish around the end of 2021 and have been signalling that tapering would need to happen before then. A bit ahead of when many analysts seemed to expect the actual announcement though, they announced that they will now start to taper: “As envisaged since the announcement of the programme in November 2020 and consistent with developments in financial markets since then, the pace of these continuing purchases could now be slowed somewhat.”
Their forecasts also now implicitly endorse a path for the policy rate which includes a rate rise by Q2 2023 (see below).
They don’t see tapering = tightening: They emphasised that tapering “should not be interpreted as a change in the stance of monetary policy” which they effectively measure as the stock of asset purchases, rather than the pace of purchases. In the same breath, however, they do point out that they stand ready to increase the pace of purchases to ensure “effective transmission of monetary policy” if necessary.
More optimistic on the economy: They have been signalling more optimism and on their new forecasts, the level of GDP is now higher in each quarter of the projection than it was in their February forecasts. That reflects expectations of the unwind of social distancing measures, falls in health risks/levels of uncertainty and the fiscal stimulus announced in March.
More optimistic on unemployment: The furlough scheme extension and better economic outlook mean improved unemployment forecasts too. They’ve also lowered their assessment of where the medium-term equilibrium rate of unemployment will get to (crudely meaning that the labour market can improve more than before without them becoming worried about inflationary implications).
Inflation signals: In line with that, they generally expect Covid to hit supply less than previously, leaving their spare capacity and inflation estimates less affected than you might expect. Inflation rises temporarily in the near-term (as before). But, in their view, near-term effects are transitory and inflation expectations are well anchored. Inflation is still around 2% on their forecast in the medium term.
What will it take to raise rates/lower the stock of planned asset purchases? Examples of “clear evidence”: Their guidance remains the same “The Committee did not intend to tighten monetary policy at least until there was clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2% inflation target sustainably.” Helpfully though, they also run through some examples: “For example, the pace of spending by households and businesses as restrictions were lifted might contribute to that evidence, as well as how unemployment and wider measures of slack in the labour market were affected by the removal of government support schemes. The sustainability of medium-term inflationary pressures would depend, to a large extent, on the evolution of the labour market and hence underlying wage pressures once the furlough scheme ended, as well as any persistent developments in non-wage costs.”. Looking at the kind of evidence listed here, a tightening in the next 12-18 months isn’t out of the question, with restrictions set to be lifted in June and the furlough scheme set to end in September.
Forecast signalling a rate rise by mid-2023: Inflation is roughly at the target in three years on their latest forecasts (1.9% in Q2 2024) and the market-implied profile for interest rates that accompanies that now has a (very modest) rate rise to a policy rate of 0.3% in the forecast by Q2 2023 and 0.6% by Q2 2024. Crudely, you can think of this rate path as being close to what the MPC expect to agree to, if their view on the broader economic outlook turns out to be correct.
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