UK BOE Bank Rate* (Nov) 0.1% vs. Exp. 0.1% (Prev. 0.1%); decision unanimous (re. rates & and to increase purchases)

Economic Assessment

• A rapid increase in COVID-19 infections - All restrictions announced up to and including 31 October have been reflected in the Committee’s judgements. Beyond 2021 Q1, restrictions are assumed to be loosened. 
  


• Signs consumer spending has softened across high-frequency indicators


• The outlook for the economy remains unusually uncertain


• Household spending and GDP are expected to pick up in 2021 Q1, as restrictions loosen


• UK trade and GDP are also likely to be affected during an initial period of adjustment, over the first half of next year given Brexit. In the event EU trade negotiations do not reach an agreement the FX rate would probably fall and relative to the November projections CPI inflation was likely to be higher


• 
  Risks to the near-term outlook for activity are judged to be skewed to the downside. The skew is somewhat smaller than was judged to be the case in August, however, as recent developments are consistent with some of the downside risks previously identified materialising.

Forward guidance

• The MPC will continue to monitor the situation closely.  If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit.


• The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.

Negative rates

• Participants attach some weight to the possibility of a negative bank rate

Forecasts

• 
  GDP: 2020 -11% (Prev. -9.5%), 2021 7.25% (Prev. 9.0%), 2022 6.25% (Prev. 3.5%), 2023 1.75%


• 
  CPI: 2020 0.5% (Prev. 0.25%), 2021 2.0% (Prev. 1.75%), 2022 2.0% (Prev. 2.0%), 2023 2.0%


• 
  Unemployment: 2020 6.25% (Prev 7.5%), 2021 6.75% (Prev. 6.0%), 2022 5.0% (Prev. 4.5%), 2023 4.25%


• The recovery takes time, however, and the risks around the GDP projection are judged to be skewed to the downside.


• In the MPC’s central projection, GDP does not exceed its level in 2019 Q4 until 2022 Q1 (Prev. end-2021). As a result, unemployment is elevated. The unemployment rate is projected to peak at around 7.75% in 2021 Q2, before declining gradually over the forecast period as GDP picks up

Link to MPR

Link to Summary & Minutes 

Reaction details (07:10)

• On the decision, which saw the asset purchase programme increased by a larger figure than expected (GBP 150bln vs. Exp. GBP 100bln to GBP 895bln) and no move on interests rates (as expected) GBP saw upside with GBP/USD moving from 1.2938 to 1.2984 before eclipsing 1.3000 to fresh session highs. Such upside perhaps resulted from the decision to keep rates on hold alongside the BoE offering comparatively sparse updates on the possibility of negative rates only acknowledging that participants attach some weight to the possibility of negative rates; a line that isn't too surprising as the BoE have made clear all options are available alongside asking banks to determine their readiness for a theoretical negative rate environment.

Analysis details (09:30)

• The MPC opted to stand pat on rates at 0.1% as expected, whilst expanding its APF by GBP 150bln (entirely via Gilts) vs. Exp. GBP 100bln taking the total size of the APF to GBP 895bln. The decision to announce additional asset purchases had been expected for several months, however, the recent imposition of a nationwide lockdown in the UK saw policymakers announce an additional GBP 50bln in purchases above consensus. Note, despite the recent lockdown restrictions having only been announced a few days before the meeting, the accompanying Monetary Policy Report noted that the committee's broader judgements reflected all restrictions announced up to and including October 31st. Policymakers noted that there are signs that consumer spending has softened across high-frequency indicators and forecast that developments related to COVID will weigh on near-term spending to a greater extent than projected in the August Report, leading to a decline in GDP in 2020 Q4. Accordingly, the MPC cut its 2020 growth outlook to -11% from -9.5%, with 2021 now seen at 7.25% vs. prev. 9%. As such, policymakers suggest that GDP will not exceed levels of growth seen in 2019 Q4 until 2022 Q1 (Prev. view of end-2021). On the inflation front, the statement noted that "CPI inflation is expected to remain at, or just above, 0.5% during most of the winter, before rising quite sharply towards the target as the effects of lower energy prices and VAT dissipate". Interestingly, the MPC flagged that the inflation path would likely be higher in the event of a disorderly Brexit via downside in GBP. Elsewhere, officials welcomed the extension of the Coronavirus Job Retention Scheme and new Job Support Scheme with the unemployment rate forecast to peak at around 7.75% in Q2 2021. One of the key takeaways from the meeting and catalysts for a firmer GBP post-announcement was the absence of any further progress on negative rates, with MPC merely referencing that "participants attach some weight to the possibility of a negative bank rate". In comments following the decision, Governor Bailey stated that the Bank will not be putting a timeline on negative rates, with the MPC Chief not wanting to front-run the findings of an upcoming commercial bank survey on the matter. Overall, beyond the addition to the Gilt remit, today's announcement offered little new to market participants with the MPC understandably cautious on the UK economic outlook whilst continuing to keep its cards close to its chest on negative rates.

05 Nov 2020 - 07:00- Fixed IncomeData- Source: Reuters