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Livesquawk - BoE Preview: Negative Rate Guidance Standout Issue At February MPR
BoE Preview: Negative Rate Guidance Standout Issue At February MPR


- MPC expected to maintain interest rate and QE programme at current pace

- Consultations on negative rates set to be published alongside MPR

- Analysts expect cut to growth forecast and upside risk to inflation

- Rate decision, minutes and statement to be published Thursday at 12.00 GMT

- BoE Governor Andrew Bailey slatted to host press conference following decision


By Harry Daniels

LiveSquawk News



2 February 2021 / 16.30 GMT



London – The Bank of England’s rate setting committee is set to decide on policy this week with the prospect of a long drawn out recovery ever more probable.


The bank’s Monetary Policy Committee is expected to leave its headline rate at 0.1% and quantitative easing (asset purchase programme) at GBP895bln on Thursday. Analysts say they expect a unanimous vote to keep asset purchase targets, guidance and policy rate settings unchanged.


Much of the discussion among UK economists has focused on the messaging regarding the pace of the UK recovery and whether the committee is more prepared now to push for further interest rate cuts in the near future.


BofA’s global research team said, “Following surging UK Covid cases and a new lockdown, more stimulus would be a reasonable response we think. But BoE speakers have suggested no inclination for extra stimulus now, preferring to debate negative interest rates. We expect no actual action at this week's BoE policy meeting.”


Public health concerns still weigh heavily

In recent days, data from the Office for National Statistics has pointed to a likely peak in the latest wave of UK Covid-19 cases, although hospitalisations remain at historic highs. Data from the ONS showed that in the week ending 24 January 2021, hospital admissions decreased slightly but remained high at 33.5 per 100,000 people.


UK Hospitalisations

On a positive note, the pace of vaccinations has increased, and the UK rate of inoculation is currently among the highest in the northern hemisphere. Yet worries over new variants and the effectiveness of current vaccines have tempered optimism. To date, the UK has vaccinated approximately 10mln people (roughly 1 in 60 adults).


As the rollout continues, the prospect an easing of restrictions grows. Last week, UK Prime Minister Boris Johnson reportedly said the government is planning for a “gradual and phased” relaxation of measures from early March, with schools scheduled to begin reopening from 8 March.


Negative rate discussion

Bank desks expect the MPC and Prudential Regulation Authority’s (PRA) consultation on “Operational Readiness for Zero or Negative Bank Rate”, launched 12 October, to have concluded. It is unclear when the results are to be published. A number of analysts said they are unconvinced by the merits of a negative rate policy.


The pressure is mounting on the committee to provide further clarity. “We think the conclusion is going to be that zero and negative rates are feasible,” Citibank’s Christian Schulz said. “Importantly though, the consultation will probably have brought up a few operational challenges which require further work. A key outcome of the meeting could thus be an order for banks to start preparing for negative rates with a definitive deadline.”


Staff forecasts to be revised
Source: BofA - click to enlarge

This being a Monetary Policy Report month, the MPC statement will be accompanied by adjusted economic projections.


Bank analysts expect the BoE to cut its 2021 growth forecast and boost expectations for 2022 as a result of the new lockdown and the so far successful vaccine rollout.


“The (re)imposition of strict Covid-19-related public health restrictions is likely to weigh heavily this round,” Schulz noted. “The bank’s forecasts for external demand are likely to be hit - bank staff had forecast growth in UK export-weighted global GDP of 5.5% in 2021, a figure closer to 4.5% may now be more likely.”


The BofA economists added, “Likely persistent cyclical weakness partly explains why we expect UK GDP to take until 2024 to return to its 2019 level. Structural issues complete the explanation.


On the inflation front, BofA analysts said they expect BoE staff to look for 2.2% inflation in 2021. “Sterling's gains (+1.9% trade weighted) and a larger near-term output gap should suppress medium-term inflation 10bp.”


Bank desks are forecasting the current output gap to close by mid-2022.


The weakness in the labour market has concerned a number of commentators, with unemployment set to worsen following the expected expiry of the extended furlough scheme in April.


Nomura’s George Buckley said the latest labour market report “looked better than expected, with payrolled employees rising 52k between November and December. Relative to the peak in February 2020, employment is down by around 828k on this measure, a 2.9% fall.


“While the ongoing furlough scheme will help limit the fallout on jobs, it seems reasonable to expect further declines in payrolled employment in Q1 – albeit more modest than the aggregate 635k fall seen in April and May last year.”


Source: Citi research - click to enlarge