The BOE will slow the pace of weekly bond-buying by £1 billion to £3.4 billion, the bank said Thursday, while keeping all policy settings unchanged at the latest meeting.
The overall target size of government bond purchases remained £875 billion. The outgoing Andy Haldane voted to reduce the target and complete the current round of purchases months ahead of schedule.
The UK economy is now seen recovering pre-COVID levels of output in 2021. “New cases in the United Kingdom have continued to fall, the vaccination program is proceeding apace, and restrictions on economic activity are easing,” the new policy statement said. “Reflecting these developments, GDP is expected to rise sharply in 2021 Q2 [and] is expected to recover strongly to pre-COVID levels over the remainder of this year in the absence of most restrictions on domestic economic activity.” The updated fan charts are below.
With the easing of COVID restrictions and fading public health concerns, consumer spending is expected to rise, “supported by households in aggregate running down over the next three years around 10% of the additional savings they have accumulated because spending on some activities has been restricted,” the May monetary policy report said.
Government spending is seen supporting the recovery as well. Looking further out (i.e., crystal ball gazing), the BOE reckoned output will “continue to grow,” but at a slower pace, “as the factors temporarily boosting growth fade.” Recall that the virus plunged the UK into the worst downturn in 300 years. (And no, that’s not a typo.)
The BOE’s new forecasts represent upgrades from the February projections.
On inflation, the narrative is a familiar one to developed market central bank watchers. The word “transitory” made a cameo. “The weakness of recent CPI outturns has largely reflected the direct and indirect effects of COVID on the economy,” the BOE said, adding that,
As has been the case in recent MPC forecasts, inflation is projected to rise to close to the target in the near term as some of those effects fade. In the central projection, CPI inflation rises temporarily above the 2% target towards the end of 2021, owing mainly to developments in energy prices. These transitory developments should have few direct implications for inflation over the medium term, however. In the central projection, conditioned on the market path for interest rates, inflation returns to around 2% in the medium term
Although the BOE was keen to emphasize that the slowing of weekly asset purchases doesn’t represent a change of policy, some were quick to characterize it as a “technical taper.” The bank will buy £1.147 billion per operation in three buybacks per week between May 10 and August 4. The pound was whipsawed.
“As envisaged since the announcement of the program in November 2020 and consistent with developments in financial markets since then, the pace of these continuing purchases could now be slowed somewhat,” the bank explained, before reiterating that “the expected completion point of the purchase program remained unchanged” and emphasizing that Thursday’s “operational decision should not be interpreted as a change in the stance of monetary policy.”
Duly noted, but a slowing in the pace of purchases is a taper. It’s just that because they’ve defined an overall stock level, they can claim policy is unchanged. “The Bank of England has tapered its QE pace, and the next step will be to offer up clues on how it might reduce its bond holdings alongside future rate hikes,” ING remarked, in a quick reaction piece. “This shouldn’t come as a huge surprise,” the bank added. “At the recent [weekly] pace, they’d have reached [their] target months too early.”
