BOE is widely anticipated to leave the Bank rate unchanged at record low of 0.1% this week. The asset purchase program (QE) will also be maintained at 745B pound. Of most interest in the meeting are the updated economic assessments, discussions on the effective lower bound (ELB) and negative interest rates, and future path of QE. We expect the central bank will eventually lower the ELB and expand the size of QE. Yet, these will be announced “around the turn of the year”. We expect the announcement will be made in November when BOE published its updated quarterly policy report.
GDP grew +1.8% m/m in May, following a sharp fall of -20.3% a month ago. From a year ago, the economy plunged -24%, easing from -25.3% in April. Meanwhile, household consumption has shown signs of pick up. Retail sales jumped +13.9% m/m in June, accelerating from +12.3% in May. This also beat consensus of a +8% growth. Better-than-expected consumption might lead to a less-than-expected GDP contraction in 2Q20. Speaking before the Treasury Select Committee in mid-June, Chief Economist Andy Haldane suggested that UK’s economy is “on track for a quick recovery” – the so called V-shaped recovery. As he suggested, “roughly half of the roughly 25% fall in activity during March and April has been clawed back over the period since”.
As the coronavirus outbreak hit the UK in March, BOE rapidly cut the Bank rate rapidly to a record low of 0.1%, the current effective lower bound (ELB) of the central bank’s policy rate. Policymakers will be concluding the review ELB adjustment in coming months. We believe the central bank will likely lower the ELB. This move would be consistent with its notion of not ruling out negative interest rates. We expect more hints about the issue this week. On asset purchases, BOE will maintain the size at 745B pound this month. In June, BOE increased the size by 100B pound until end of the year. We notice the central bank has tapered purchases to below 7B pound weekly in July, from over 10B pound from April to June. We do not interpret this as a sign of tightening. Rather, we believe that BOE attempts to preserve the current envelope of asset purchases until November, when the announcement of QE expansion is made.