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GBP at risk with BoE Rate Decision tomorrow: here's what to expect



GBP at risk with BoE Rate Decision tomorrow: here's what to expect


At 0700BST/0200EDT, the Bank of England releases the result of its latest interest rate and policy decision, as well as the quarterly Monetary Policy Report (updates economic forecasts for the UK economy).


At its last meeting the bank topped up its QE programme by a further £100bln, added on top of the emergency £200bln QE expansion back in March as a result of the Covid-19 pandemic (the BoE’s total QE programme is £745bln). This is enough to allow weekly bond purchases to continue until the end of the year at a rate of roughly £4.5bln per week. Thus, according the Lloyds Bank, BoE policy is on a relatively “pre-determinded” course for the rest of the year.


Thus, most analysts do not expect the BoE to make any major policy changes at its meeting this week, with rates to be left on hold at 0.1% and QE parameters to be left unchanged.


With no major policy changes expected in the coming meetings, trader/investors are more focused on the tone of the meeting; i.e. will the bank come across as dovish on the outlook for the UK economy, implying that monetary policy is more likely to be eased further towards the end of the year than held steady or tightened.


Most BoE voting members (otherwise known as MPC members) have acknowledged that the fall in economic activity in Q2 this year as a result of lockdowns was not as bad as initially feared. However, this more optimistic take on how the UK economy performer in the first half of the year is unlikely to be extrapolated to a more optimistic take on where the UK economy is headed, with MPC members concerned primarily by three key risks to the UK economic outlook;


1) Uncertainty over the future trading relationship between the UK and EU remains highs, amid deadlock in negotiations between the two sides. This is likely to already be having a negative impact on the economy through reduced business investment.


2) The UK labour market might be about to see significant deterioration – Lloyds bank note that, “at present, around 9.5mn jobs have been furloughed under the Coronavirus Job Retention Scheme (CJRS), equivalent to around one third of all employees. In the absence of the CJRS, it is highly likely that the unemployment rate would have risen sharply (see chart 3) – a risk that may become more prevalent in the coming months as the scheme is wound down, particularly with firms displaying weak hiring intentions.”


3) Finally, Lloyds Bank also note the risk that of a “prolonged implementation of social distancing measures, both voluntary and involuntary”. In particular, continues the bank, “the possibility that individuals may choose to maintain a greater degree of social distancing – over and above that mandated by the authorities – which could lead to a much slower upturn in economic activity, particular in those sectors which require higher levels of face-to-face interaction.”


In light of these risks to the UK economy, the BoE will likely want to emphasise that it is prepared with further monetary easing measures if needed. This could come in the form of further QE expansion, as well as further rate cuts later in the year/early next year (the bank is currently reviewing the pros and cons of negative rates, and a decision on their efficacy is expected at the end of the year).


The case for further stimulus will almost certainly be supported by the bank’s updated economic forecasts, which are likely to show that the economic recovery will be protracted and inflation subdued for years to come.


GBP


In terms of the GBP reaction, most analysts see very little by way of hawkish risk going into this meeting; as explained above, the bank is likely to want to give off a dovish message. Obviously, if the bank completely confounds expectations by coming across as much more optimistic on the economy than expected, GBP will be in for some sharp upside. But this is unlikely. The question, then, is more how dovish the BoE message will be – the more pessimistic on the outlook for the UK economy they come across, the worse for GBP. 

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