To taper or not to taper, that is today’s question for the Bank of England
The two most important days of the week are here; tomorrow, we have the US NFP data, and today, we have the monetary policy decision by the Bank of England.
No firework is really expected at this event as it is widely believed that the BOE will leave the interest rate as it is, commented Naeem Aslam, chief market analyst at Avatrade, this morning.
“Traders are also not expecting any change in the asset purchase program from the BOE, although there is a strong possibility that the bank may upgrade its economic growth projections for the country,” Aslam said.
“The reality is that the Bank of England is in a much stronger position now as compared to a few months ago, and the primary reason for this is the massive success on the coronavirus’s vaccine process,” he added.
Vaccine progress
Nearly half of the population has already received its first dose of coronavirus’s vaccine, Aslam pointed out, and new daily cases have fallen below 2,000. “If we looked at the same figure a couple of months ago, this number was well over 40,000 a day.”
The UK has also eased off a number of coronavirus-related restrictions, and more restrictions will be eased off this month.
In addition to this, international flights, especially to Europe, will also be opened this month, and businesses have started to bring back their employees in offices.
The public transport system shows that traffic flow has increased significantly, and the UK is also going to drop the social distancing rule very soon. Basically, all lockdown restrictions will be dropped by 21 June.
“It is true that the Bank of England has been optimistic about economic growth, but the actual economic numbers have been stronger than their expectations,” Aslam noted.
“This is despite the fact that the UK faced two challenges at the same time: coronavirus and Brexit. As a result, we have seen some serious strength in Sterling, and it seems like that there is still plenty of steam left in its rally,” he added.
Having said all of this, Aslam thinks it is highly unlikely that the Bank of England will pull the trigger on the tapering process before the Federal Reserve.” Although, the timing for them could be incredibly close, just like before,” he said.
Policymakers’ take
As far as the Bank of England is concerned today’s policy decision is important in the context of how policymakers see how the UK economy will evolve over the next few months, given how different the economic picture is now, from when they last met back in March, said Michael Hewson, chief market analyst at CMC Markets UK.
“We can expect the bank to raise their growth as well as inflation forecasts for a start, given the strength of recent economic data, and the positive outlook for Q2. Their biggest conundrum will be as to how they will decide on the durability of the economic rebound,” he said this morning.
The March meeting saw some members of the Monetary Policy Committee become more optimistic, notably chief economist Andrew Haldane who suggested the potential for a coiled spring economic rebound from a build-up of excess savings.
His departure from the MPC in the coming months will be keenly felt, mainly due to his ability to think outside of his comfort zone, Hewson noted.
“While some of his ideas have attracted criticism and scorn in some circles, at least he was prepared to think outside of the box, unlike other members of the MPC who seem rather two dimensional in their thinking when it comes to monetary policy,” he said.
“Mercifully all of this talk of negative rates has been put to one side, with the vaccine rollout plan now much further advanced and various restrictions set to be eased further, new virus variants notwithstanding,” Hewson concluded.
These potential improvements raise the prospect of some early discussion about the prospect of the bank becoming less accommodative over concerns that current policy might be a little too easy.
“No changes to monetary policy are expected, but we could start to see some taper talk. The recent pause in 10-year gilt yields is likely to have prompted a sigh of relief, however given the improvements that might be seen in the data in the coming months we might see some early discussions about reining back on the bond buying program in the form of modest tapering,” Hewson concluded.