Yesterday the Bank of England announced the results of its latest policy meeting. As expected, the Bank has unanimously decided to hold the base rate at a record-low 0.10% and voted to maintain its existing programme of UK government bond purchases at £875Bn as well as continue financing investment grade corporate debt at £20Bn.
With no change in the scale of the stimulus programme (albeit, the programme will run at a slightly slower pace), it was only the dissent from Chief Economist Andy Haldane voting to limit the size of total asset purchases to £845Bn, that has perhaps caused a bit of surprise in financial markets. Whilst he will be departing from the Bank shortly, his hawkish sentiment may be shared by others, albeit to a lesser degree.
Back in February tighter monetary policy seemed very distant, with negative rate chatter only just having been silenced. Overall, there is plenty of reason to be more optimistic now. The news flow since the Bank of England’s last forecasts in February has been largely positive, with official statistics as well as estimates by banks pointing towards a strong recovery. In April, Goldman Sachs said they expect UK GDP growth to reach 7.8% this year, exceeding their prediction for the US. Jes Staley, chief executive of Barclays Bank, has expressed similar sentiment, predicting the strongest year for economic growth in the UK since the aftermath of WW2, at 6.5%.
So it comes as no surprise that the Bank’s economic forecast has been upgraded. With UK GDP expected to have dropped by around 1.5 per cent in Q1, less than originally assumed in February, the committee revised its growth forecast for the year to 7.25 per cent, up from 5 per cent three months ago. Given record highs in UK household savings, combined with demand accelerating since the easing of lockdown restrictions and a strong vaccine roll-out, GDP in Q2 is expected to come in very strongly, although still about 5 per cent below pre-pandemic levels.
Inflation is predicted to stay under control over the course of the year, only projected to rise temporarily over the 2 per cent target towards the end of 2021. As the Chancellor’s jobs protection programme is coming to an end in the third quarter of the year, unemployment levels are forecast to increase to just under 5.5 per cent, significantly lower than the Bank’s previous estimate at 7.8 per cent and not far off the figure for the three months to February at 4.9 per cent.
Nonetheless, despite all the optimism and talk of reduction in stimulus, the Bank has warned to remain cautious. In the short run, worries persist about the surge of Covid-19 cases elsewhere in the world, most notably India, whereas in the medium-term questions remain about the growth of the economy and specifically, the trajectory of both supply and demand. In line with previous Committee meetings, the Bank has hence once again reiterated that they do not intend to increase rates unless they see clear evidence of significant progress both in employment and the more permanent return of inflation to the target level.
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