BoE quick take: sterling hits one-week high as MPC exits emergency mode

This was not as hawkish as some might have wanted but it’s a clear signal the Bank of England is exiting emergency mode.

The Bank of England left interest rates on hold at 0.1% and maintained the size of its asset purchase programme at a total of £895bn. By way of a hawkish parting shot Andy Haldane dissented and voted to lower the gilt purchase envelope from £875bn to £825bn. His views are no longer particularly relevant to future monetary policy decisions since he is leaving after the June meeting, but it certainly underlines the fact that the Bank is exiting the emergency phase. Unless there is another deadly wave and new lockdowns the next move on rates will be up.

Whipsaw: Sterling spiked lower on the release, with GBPUSD dropping under 1.3870 from a high above 1.3920 earlier this morning before reversing course and hitting fresh daily highs north of 1.3940, since Apr 30th. Looks as though the slowing of bond purchases to a weekly rate of £3.4bn from £4.4bn amounts to a taper, but it appears to be not much more than the kind of technical taper that had already been flagged in February. Gilt yields are steady with the 10-year at 0.82% and 2-year around 0.050%. The FTSE barely budged and is steady above the all-important 7040 area, though back down from the highs of the day closer to 7070.

The Bank stressed the decision to ‘somewhat’ slow purchases is an ‘operational decision’ and ‘should not be interpreted as a change in the stance of monetary policy’. This is up for debate – it at least signals the Bank’s confidence in the economic recovery, otherwise it would keep on at the higher rate and stand ready to increase the size of the envelope. But we also must acknowledge that it’s really about creating an gentler run-off for QE than might otherwise be required later in the year to avoid exceeding the envelope. On the whole it looks as though the FX market doesn’t see this as particularly hawkish with cable failing to make good on the breach of 1.3940 and settling back to around 1.3920.

The growth outlook is much improved this year with the Bank forecasting growth down a little in Q1 and then a sharp recovery in the second quarter, though activity will remain about 5% below the same period in 2019. The economy is expected to recover to pre-pandemic levels over the course of 2021, however GDP growth is seen cooling over the rest of the forecast period. The MPC also stressed that the outlook for the economy remains ‘uncertain’. The bank reiterated that spare capacity in the economy is expected to be eliminated in 2021 and there is a temporary period of excess demand, before demand and supply return broadly to balance.

Pull-forward in demand: The Bank revised 2021 growth up to 7.25% from 5% in the February Monetary Policy Report, but revised growth for 2022 down to +5.75% in 2022 from a previous forecast of 7.25%. The impact of the vaccine rollout is clear to see from this. 2023 forecast remains at +1.25%. Inflation is forecast to return to 2% in the medium term, and hitting 2.3% in a year’s time. Overall it looks like the Bank sees inflation staying well under control over the forecast period, which does not indicate it will be in a hurry to raise interest rates.

Whipsaw move sees GBPUSD hit its highest since end of April before easing back to be almost flat on the session.