The Bank of England has eased monetary policy pretty much as expected today. The Monetary Policy Committee has held interest rates steady at +0.1%, whilst also increasing its purchase of government bonds by an extra £100bn. However, sterling seems to like this seemingly dovish move (at least initially). All the talk in the run up has been how far the Bank of England is willing to go on loosening monetary policy. At least at this stage, it would appear, it is not willing to fire the final bullet.
- Hold interest rates flat at +0.10% in a unanimous vote of 9-0.
- Increase asset purchases by another £100bn (to a total of £745bn). The voting for this though was 8 in favour and one dissenter (Andy Haldane who wanted to maintain the current stock of purchases).
However, the expansion of the expectations show that perhaps it could have been more.
As can be seen in the graphic, whilst this increase in QE was arguably less dovish that it could have been. Whilst the consensus was appeased, QE could have gone way further and some in the market thought it could have been as large as another £200bn this time around. It will be interesting to see how sterling responds now, as the euro was boosted in the wake of the ECB’s larger than expected increase to its own emergency QE programme, the PEPP.
More Asset Purchases to come?
As at 17th June the BoE had purchased £617bn of assets.
The run rate of purchases is currently around £55bn per month and on that run rate the extra £100bn would be done by the end of August. However, they also said that the purchases will run to the end of the year. This suggests that the run rate of purchases will slow considerably in the coming months.
Whilst the increase of £100bn was expected, it is rather less of the big bazooka than employed by the ECB for example (the €600bn PEPP was more than the €500bn that had been expected and runs to the middle of 2020). Unless there is another announcement in August, the pace of QE purchases has slowed considerably and the programme will run out way before the ECB’s. The Federal Reserve and Bank of Japan are also running unlimited purchases which also look set to run deep into 2021.
It is difficult to imagine the BoE will halt its asset purchases so soon. The UK is being hit hard by the COVID-19 pandemic and the economy will need to be supported for some time to come (and that is before we take into account Brexit trade deal scenarios with the EU).
The issue of negative interest rates
There was no mention of negative rates today. This is one of the key reasons why this should be sterling supportive as the dust settles on the decisions. Some MPC members have previously talked about negative rates, but it was kept off the agenda today.
The ECB and Bank of Japan have got negative interest rates and will do so for some time to come. The fact that the Bank of England does not appear willing to even formally discuss it at this stage should help to support sterling in the coming weeks.
Yields ticked higher and sterling has also been supported. The main factor seems to be the lack of negative rates (whilst perhaps the one dissenter on QE has played into this too).
UK 10 year Gilt yield – has jumped around 5 basis points. This has helped to steady a very subdued yield in recent days. If a floor of +0.13%/+0.16% can begin to develop then this would be positive for sterling.
GBP/USD – initially picked up on the announcement, however the gains have now all been given back. The key near term gauge will be the band of support between $1.2450/$1.2500 which has held throughout the past week. Is this decision enough to prevent a slide in Cable?