The BoE’s announcement this morning fell in-line with expectations; in a unanimous decision the central bank left rates at historically lows of 0.1% with no changes to the GBP 745bn QE package, following the GBP 100bn in June. The central bank said it would not look to tighten policy until there was a clearer inflation picture; however, the risks are very much to the downside. The BOE forecasts that inflation would fall well below the 2% target level, reaching 0.25% later this year, eventually spiking back up in two years. The central bank also added that it will remain accommodative and will review a range of options.
Sterling extended its gains against the dollar following the announcement. Meanwhile, as many investors have been increasing their holdings in Gilts, the yield on the benchmark 10-year drifted to all-time lows this week; the underlying support from the BoE’s purchases have improved sentiment. The pace of debt purchases is however set to fall to GBP 4.4bn, from GBP 6.9bn, from Tuesday next week.
Following May’s pessimistic projections, the BoE now forecast unemployment to rise to 7.5% (from 10%) by the end of the year, that is ~3 million people out of work. Moreover, GDP is expected to contract by 9.5% this year, the worst reading for nearly a century. This is however much lower than May’s estimates of a 14% drop. These figures are more than likely to change, but it appears that, as with many key data readings and economic forecasts globally, the importance of the exact figures in a Covid-induced crisis appear to hold little weight. In terms of financial stability, the BoE said credit losses by UK banks will be “somewhat less” than previously estimated. The BoE “continues to judge that banks have buffers of capital more than sufficient to absorb the losses”.
Chancellor Sunak warned last week that UK unemployment could spike higher when the furlough scheme, which has begun to be scaled back from the beginning of this month, is due to come to an end in October. There have been calls to extend the scheme into next year to prevent huge unrecoverable job losses and instead lend support to an already fragile economy. With this, coupled with the threat of a no-deal Brexit and further localised lockdowns, the Chancellor and the BoE (with three more meetings remaining this year) have a number of tough decisions to make. The BoE could look to add a further GBP100bn to its asset purchases in the Autumn. And, with limited monetary scope remaining, we have to ask whether negative rates, which are under “active review” at the BoE, will remain on commentators’ lips. Something pension assets would rather not think about.