No Signs Of QE Tapering From The BoE Yet (06 August 2021)

#OPINIONLEADER# #BoE_InterestRateDecision#

The BoE’s decision.

As widely expected, the Bank of England (BoE) carried out no change to its monetary policy during its meeting yesterday. Interest rate remains at 0.10% with all eight voting committee members voting for no change. Quantitative easing (QE) remains at £895 billion in total. Michael Saunders, one of the hawks of BoE, voted for a reduction in government bonds purchase by £45 billion.

Overall positive outlook of the UK economy in the near future.

In the quarterly release of the BoE’s monetary policy report, the central bank said that the “impact of COVID on the UK economy fades further over time” although the Delta variant of the virus continues to spread in the UK. The confidence on the economic recovery led to the central bank’s positive revision of its economic projections.

Economic Projections

 202120222023UK GDP7.25 (7.25)6.00 (5.75)1.50 (1.25)CPI Inflation4.00 (2.50)2.50 (2.00)2.00 (2.00)Unemployment Rate4.75 (5.00)4.25 (4.50)4.25 (4.25)

*Figures shown in parentheses refers to projections from May 2021

The BoE expects the UK economy to return to pre-pandemic level during the fourth quarter of 2021. As with the other major central banks, the BoE also felt that the recent rise in inflation is due to transitory factors. With the ceasing of the UK furlough scheme at the end of September, BoE Governor Andrew Bailey highlighted that unemployment was “no longer expected to rise”. He also mentioned that the challenge for the economy now is whether employers can fill up the job vacancies.

On the matter of QE.

Little was mentioned on QE during this meeting. The BoE said towards the end of its rate statement that

“should the economy evolve broadly in line with the central projections in the August Monetary Policy Report, some modest tightening of monetary policy over the forecast period is likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term”.

The committee members also intend to start unloading the bond purchased by the central bank when interest rate has risen to 0.5% and will consider to do so actively when interest rate is at least 1%. According to the BoE, interest rate is projected to be at 0.5% by the third quarter of 2024. Hence, it is likely that the central bank will be holding on to its purchases at least in the near future.

Interest Rate Projection

2022 Q3: 0.2%

2023 Q3: 0.4%

2024 Q3: 0.5%