PIMCO: BoE Preview: More QE, rates unchanged

BoE will announce its next policy decision on Thursday (noon), followed by a press conference at 12:30pm. We expect the BoE to increase its QE envelope by +£100bn and give no further guidance on negative rates.

Current policy: Policy rate at +0.1%. Ongoing QE, total YTD envelope of +£300bn (+£268bn of which bought so far), with latest +£100bn announced in June. Weak form of forward guidance (“The Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”).

More gilt purchases. We expect BoE to add +£100bn of QE purchases on Thursday. We had expected a smaller increase (+£75bn) last week, but given the new lockdown measures announced over the weekend, we now expect a larger envelope. Our crude working assumption continues to be that the BoE calibrates its purchase programme to roughly match the size of the fiscal deficit. The current envelope (at the current purchase pace) runs out by mid-December, so the BoE could possibly afford to wait until the December meeting before announcing more QE. But given the deteriorating macro situation, we expect the BoE to act already this week. More generally, we continue to see QE as BoE’s marginal easing tool — and if the Covid/lockdown situation remains grim in early spring, the BoE will likely increase the QE envelope even further.

But no more corporate QE. BoE finished its +£10bn corporate QE programme in early October. We expect no further corporate QE unless we have another severe market dislocation or a no-deal Brexit.

No further guidance on negative rates. In the September minutes, BoE said that it would start looking into the operational considerations of negative rates. Since then, it has asked banks about their preparedness and whether their systems can handle a negative/zero policy rate. These operational considerations will take “many months” to complete, likely by the middle of the spring at the earliest. In the meantime, we expect no further guidance on negative rates. Separately, recent comments/speeches suggest the MPC is split on the issue. Two external MPC members (Tenreyro, Vlieghe) have made supportive comments about negative rates. Three internal MPC members (Bailey, Haldane, Ramsden) seem much more sceptical. The remaining four MPC members (Broadbent, Cunliffe, Haskel, Saunders) have so far been fairly quiet on the topic.

Bar for negative rates still high in our view. We still think negative policy rates are unlikely over the Cyclical horizon, given their adverse side effects and the limited pass-through from recent rate cuts. We do not see BoE’s operational investigation into negative rates as a signal — given that negative rates are now part of the toolbox (as of the August policy meeting), it is no surprise BoE is looking into the operational details of them. What’s more, BoE has been clear that is sees negative rates as less effective in a downturn, as they impair bank balance sheets at a time when loan losses are high. Negative rates seem therefore unlikely in today’s situation, or even following another adverse shock. They would instead be more likely — though still not our base case — in a new steady state in which inflation has settled below target, activity growing at decent pace, and with no immediate pressure on bank balance sheets.

New macro forecasts. The UK recovery has lost significant pace since the September, with PMIs, mobility, and other high-frequency indicators falling. Even before this weekend’s lockdown announcement, BoE’s latest forecast (-9.5% GDP in 2020) was looking much too optimistic. The latest restrictions mean that the UK is now heading into another sharp contraction, and the BoE will have to make significant downward revisions to its forecasts.
Source: PIMCO