UK BOE Bank Rate (May) 0.1% vs. Exp. 0.1%, unanimous decision; total purchases maintained at GBP 645bln (QE vote split 7-2, 2 preferring a increase of GBP 100bln) - existing monetary policy stance is appropriate

• Stand ready to take further action as is necessary to support the economy


• Timeliest of indicators on UK demand have generally stabilised at very low levels


• Financial Stability Report: Having conducted a desktop stress test, the FPC judges that the usable buffers of capital built up by banks are more than sufficient to absorb the losses under the MPR scenario and also, with the support of the Government’s lending guarantee schemes, to help the corporate sector finance its cash-flow deficit. Link to Financial Stability Report Release
  


• CPI likely to drop below 1% in coming months


• In the illustrative scenario, the recovery in economic activity is relatively rapid and inflation rises to around the 2% target, conditional on the scenario assumptions that include a gradual easing in social distancing, and supported by the very significant monetary and fiscal stimulus.  Relative to the scenario, the Committee assesses that the balance of risks to the economic outlook lies to the downside.
  


• For Q2: GDP is expected to contract by 'around a quarter'; Note, OBR said a 0.35% contraction is a possibility for Q2
  

Conditioning assumptions to the illustrative scenario below:

• Social distancing measures and government support schemes remaining as they are until early June, before being gradually unwound by the end of Q3.


• Job Retention Scheme lowers the number of jobs that are lost.


• Assumed that most furloughed workers do not seek work elsewhere


• Some companies are assumed to cease or scale back their operations for a time


• Some of the spending foregone while social distancing measures are in place is assumed to be made up but lower confidence and higher uncertainty are assumed to persist for some time and dampen spending


• Falls in risky asset prices also weigh on GDP; But monetary and fiscal policy actions support spending


• Assumption that the UK moves to a comprehensive free trade agreement with the EU on 1 January 2021.


• Link to Monetary Policy Report


• Note: UK GDP in the scenario falls by 14% in 2020 as a whole. Activity picks up materially in the latter part of 2020 and into 2021 after social distancing measures are relaxed, although it does not reach its pre‑Covid level until the second half of 2021
  

Reaction details (07:23)

• Support was seen for Sterling as some of the bets around further easing for QE were unwound; albeit, gains potentially capped given the two dissenters who called for further QE provisions – something which will be of heightened focus in June given the current rate of purchases. Additionally, the growth profile appears to be relatively upbeat reaching pre-COVID levels in H2 2021, with some desks suggesting such optimism may be misplaced.

07 May 2020 - 07:00- Fixed IncomeData- Source: Reuters