With markets stabilising and the monetary policy toolkit looking rather well-worn, the Monetary Policy Committee has chosen to hope for the best and avoid further large scale policy action. Rates have been kept unchanged, as were asset purchases, despite MPC members noting that at the current pace, Quantitative Easing will reach its declared limit by July.
This means the MPC will either have to decrease the pace of purchases and tighten policy in the middle of the worst economic shock since the Second World War, or raise the QE limit at some point. The lack of increase in asset purchases is therefore trivial – the MPC is aware they will almost certainly have to take this step at some point, and seems to have held off this time around for the sake of saving a bit of drama for the next meeting.
The Bank of England has followed the OBR in rebranding their forecasts as an “illustrative scenario”, a change of language that reflects the extent to which the forecasts are conditional on changeable assumptions. This rightly puts the focus on the major uncertainties that the MPC will be watching to determine future policy, the most important of which is the shape of the economic recovery. In turn this is contingent on how long lockdown measures remain in place, and the extent to which their easing enables the economy to re-open.
The base case in the Monetary Policy Report is actually fairly optimistic, envisaging a 14% decline in GDP this year, followed by a 15% increase the next, allowing GDP to regain its pre-crisis level within a year of the peak of the shock.
During the financial crisis, UK GDP did not regain pre-crisis levels until 2013, although the shock was of a different nature and the recovery was hampered by austerity. With the aggressive synchronised fiscal and monetary measures being taken by the UK there are certainly good grounds to hope the rapid recovery envisaged in the illustrative scenario comes to pass. However, at this point there’s little indication of how lingering social distancing measures will affect growth after the peak of the pandemic, and so for now hopes of a V shaped recovery are best kept as “illustrative scenarios” as opposed to firm expectations.
MPC forecast envisages rapid GDP recovery
Author: Ranko Berich, Head of Market Analysis