Bank of England meeting: What to expect later today
With more than 50m doses of the Covid vaccine administered and positive signs of economic recovery, all eyes will be on the Bank of England later today.
While restrictions were reintroduced in the first quarter the hit to GDP seems to have been less than originally expected, and there are encouraging signs in the second quarter.
The central bank’s Monetary Policy Committee will meet today and investors will be watching closely for any signals about when it will start turning more hawkish. It is generally accepted interest rates will remain unchanged, but what will the bank’s outlook look like?
GDP forecasts set for an upgrade
The Bank of England has generally been pretty optimistic in its forecasts. In February it projected the UK economy would return to its pre-pandemic size by the end of the year and they were somewhat vindicated when the hit to Q1 GDP was less severe than anticipated.
The labour market is showing remarkable resilience with manufacturing growth hitting a 27-year high in April, as production increased for the 11th consecutive month.
“While it still looks likely that some jobs will be lost when the furlough scheme ends in September, it also looks like the peak in the unemployment rate will be less than the Bank of England previously forecast,: Howard Archer, chief economic advisor to the EY Item Club.
“Consequently, it looks highly likely that the Bank of England will significantly revise up its GDP growth forecast for the UK economy in 2021 – although it may partly offset this by lowering expected growth in 2022 – and improve its unemployment projections,” he added.
BoE to sit tight on monetary policy change
On the back of this improved backdrop, some economists predict the committee could indicate a slight slowdown in the pace of its asset purchases after Thursday’s meeting.
However BNP Paribas analysts warn this would not mean a “fundamental change in the monetary policy” given the bank’s projections might show that markets have already priced in too many rate hikes.
The BoE still has approximately £110bn of gilt purchases to make this year and at the current £4.4bn weekly pace, it will hit its target level of £875bn before the end of the year when it has said it will stop actively expanding holidays.
“A cut in the weekly buying pace to roughly £3bn/week from now onwards would allow the Bank to reach its target around the end of the year. The alternative option is to continue at the current, more rapid pace until the June meeting, though clearly this would require a steeper cut in pace,” Smith and Bouvet said.
The MPC might also reassess its plan for how to tighten monetary policy. The EY Item Club believes the BoE will likely hold off on acting throughout 2021, keeping interest rates at near-record levels. In the last meeting, the committee indicated it was prepared to take further action should the economy fail to pick up but the upbeat outlook means further stimulus is unlikely.