Bank of England decision: What to expect

The Bank of England is set to announce its latest monetary policy decisions on Thursday at 12:00GMT. Released alongside the decision will be the minutes from the meeting which will show how members of the Monetary Policy Committee (MPC) voted on interest rates and the bond buying programme.

The Committee is expected to vote 9-0 to keep both the interest rate unchanged at 0.1% and the asset purchase programme at £895bln.

The Bank of England will not be releasing its economic forecasts this time around but will provide an updated outlook on the UK economy.

“Much has happened since the February update including the continued vaccine deployment, the roadmap out of lockdown and the extension of support measures in the Budget,” said analysts at Lloyds (LON:LLOY) in a research note. “These factors should reinforce the Bank’s confidence of a decent economic rebound from Q2.”

Budget Stimulus and Rise in Gilt Yields
UK Chancellor Sunak’s budget in early March included various fiscal support measures, such as an extension of the furlough scheme. The Bank of England will have to judge whether the extra stimulus in the Budget will justify tighter financial conditions.

“In our view, tighter financial conditions since the BoE’s last policy meeting outweigh the Budget boost,” said Bank of America (NYSE:BAC) Global Research analysts. “We doubt that the BoE will agree. Likely, they will note that the Budget news will cut their forecast peak for employment and aid growth in the short term.”

The Bank of England has struck a cautiously optimistic tone recently and could well follow the Federal Reserve in their reluctance to look too much into the rise in bond yields. Just this morning, the United Kingdom 10-Year yield has jumped another 5bps and is now just below 0.9%.

“Governor Andrew Bailey has said this simply reflects stronger optimism,” said ING in a research note. “Unlike the European Central Bank, that suggests the BoE will offer little pushback against these moves at the meeting this week.”

Recent Commentary
The Bank of England Governor Bailey appeared to break the rules this week when he spoke during the Bank’s “quiet period”. Under the current guidance on the central bank’s website, MPC members must not give speeches on monetary policy matters or talk to the media, on or off the record, from the point that the pre-MPC meeting is held (generally eight or nine days before the decision), until the policy announcement is made.

Bailey spoke to the BBC earlier this week and said he was “more positive” about the economic recovery from the pandemic, although noted that was with a “large dose of caution”.

Andy Haldane, the Bank’s chief economist, has also been upbeat recently, suggesting that the UK economy is poised like a “coiled spring”, ready to release large amounts of “pent-up” financial energy.

On the other hand, Silvana Tenreyro continues to support the idea of negative interest rates, although there is no suggestion she will vote for a cut at this meeting. The MPC member said there was no good evidence that a cut in interest rates below 0% would, past a certain point, weaken the economy rather than boost it.

Market Reaction
Bank of America says that with Brexit now seemingly a distant memory, they expect BoE rate decisions will be more significant for GBP FX performance in the months ahead.

“For GBP, what matters is the vote split – whether any of the more vociferous hawks on the Committee deem the situation conducive to a rate hike now. This would be a strong GBP positive, in our view,” Bank of America argues.

“We believe, however, that markets will likely expect a balanced message: optimism over emergence from lockdown but that downside risks remain. Given recent BoE communication and the way markets have chosen to interpret, we believe that the bar for a dovish surprise (and therefore weaker GBP) is high.”

Ahead of the meeting, GBP/USD trades relatively flat on the day and remains below 1.4000.