While developments have been positive since the February meeting, the Bank of England decided to marginally push back against market expectations of an earlier normalisation by maintaining the current pace of quantitative easing (£4.4bn weekly) and requiring visible progress in inflation data towards the target.
While the latter isn’t a new development from the BoE, the need to focus on how data comes in now as opposed to forecasted data was thrust into the limelight by the Fed and Chair Powell last night. The connotations of such a stance suggests the BoE may join the Fed in sitting behind the curve during the initial part of the recovery, which would be a dovish development, although it is too soon to draw such inferences. Sterling exhibited the slight unwind of hawkish expectations after the headlines came in, however, as it fell 0.17% against the dollar to touch fresh daily lows.
GBPUSD dips on BoE announcement as lack of movement pushes back hawkish expectations at the margin
DIGESTING THE MINUTES: THE RETURN OF “RANGE OF VIEWS”
The Monetary Policy Committee had been singing from the same hymn sheet for the most part of the last year, with divergences only appearing in views towards negative rates. However, as the recovery starts to mature and the exit from lockdown measures etches closer, the meeting minutes start to show a “range of views” again, largely relating to the level of excess capacity the UK economy currently has. This is as key for determining the inflation outlook as how committee members envisage post-pandemic consumption patterns, of which there is a wide array of views also.
This uncertainty on the medium-term outlook arguably resulted in the MPC not showing a definitive reaction to the positive fiscal and health developments witnessed since February’s meeting.
Coupled with the Bank’s “risk management considerations”, which suggest policy should mitigate downside risks during the recovery until the progression of data suggests otherwise, the minutes continued the unassertive yet mildly dovish tone outlined in the policy statement.
Going forward, the markets’ understanding of how policymakers view the economic recovery with regards to potential supply constraints and reaction by consumers to the easing of lockdown measures will be key. This places even more emphasis on inter-meeting communications by the Bank of England. May’s Monetary Policy Report will not only internalise the positive developments since January’s forecasts but also the expected reaction of output and consumption to the easing of restrictions. MPC members’ views may be guided by partial data releases after the April 12th easing should the government be able to stick to the loose timeline, but as the recovery progresses the pressure on the MPC to take a more active stance will build. At a minimum, markets will expect further guidance on the QE programme, which at present is expected to naturally taper towards year-end.
Front-end gilt yields drop as BoE maintains the pace of purchases, future of QE will be the big talking point in the coming months
Author: Simon Harvey, Senior FX Market Analyst