The Bank of England published its much-anticipated May inflation report today. The document didn’t alter the MPC’s policy stance. All parameters remain unchanged. The policy rate stands at 0.1% with targets of asset purchase programmes being £875bn and £20bn respectively for UK Gilts and for corporate bonds. Chief economist Haldane, who leaves the central bank in June, dissented on the Gilt buying, favouring a lower target for the stock of purchases (£825bn) on the back of his own very bullish economic assessment. The BoE increased its total QE target from £745bn to £895bn in November last year, but hasn’t fully spent that £150bn envelope yet. Because of upward revisions to especially growth and to a lesser extent inflation forecasts, the BoE announced to slow the weekly pace of purchases from around £4.4bn to £3.4bn, implying buying will end around the end of the year rather than at the beginning of November. The weekly buying pace will be revised again at the August inflation report. In a probably tactical decision the BoE acknowledges the economic revival, but by smoothening the purchases postpones future pressure to adopt rate hikes in a next phase. In its policy statement, the BoE puts forward two conditions for that (rate hike) to happen: significant process towards eliminating spare capacity and achieving the 2% inflation target sustainably. The economic assessment suggests that the former could already happen this year, while inflation will only return (fall back) to the 2% target in two to three years. The detailed inflation report now pencils in a first hike (unlike the February report) by Q2 2023. New GDP projections reflect a faster recovery thanks to the efficient vaccination process. The BoE puts growth at 7.25% this year (from 5%), at 5.75% next year (from 7.25%) and at 1.25% in 2023 (unchanged). Inflation prognosis showed a similar dynamic: higher in 2021 (2.25% from 2%), lower in 2022 (2% from 2.25%) and unchanged in 2023 (2%). Sterling traded rather weak in the run-up to the BoE decision and continues that way after some volatility. The reason is probably twofold. First, it had been discounted that the BoE would turn more bullish on the economy. The smoothening out of asset purchases extends their presence on the bond market. Second, markets are wary of today’s Scottish parliamentary election. An outright majority for the SNP could be seen as a proxy for a referendum on joining the EU and is at least negative for sterling in the short term. The UK yield curve steepens with yield changes ranging between -0.9 bps (2-yr) and +2 bps (30-yr). Action on main FI and FX markets was muted. Main European indices cede slightly ground. The divergence between rising US inflation expectations and sliding US real rates hurts the dollar. EUR/USD bounces away from the 1.20 big figure towards 1.2066. German and US yield curve bear steepen with yields up to 1.5 bps higher (30-yr).
The Turkish central bank today kept its policy rate unchanged at 19%. “Taking into account the high levels of inflation and inflation expectations, the current monetary policy stance will be maintained until the significant fall in the April inflation report’s forecast path is achieved,” the monetary policy committee said. It also repeated that nominal interest rates would be kept above inflation. Inflation reached 17.1% in April, but the new governor Kavcioglu recently indicated that price growth might have peaked. The Turkish lira gained marginally ground immediately after the policy decision, but soon reversed the initial gain. EUR/TRY rebounded off the 10.00 area and currently trades again in the 10.05 area. The historic low for the lira at EUR/TRY10.27 remains within reach.
The Norges Bank kept its policy rate unchanged at 0.0%. It indicates that policy will stay accommodative, but some support can be withdrawn as the economic rebound develops. Low interest rates accelerated the return to more normal output and employment levels. The MPC also placed weight on the marked rise in house prices since spring 2020. A long period of low interest rates increases the risk of a build-up of financial imbalances. Inflation is expected above the 2.0% target this year, but should ease next year. A H2 2021 rate hike is penciled in. The krone (EUR/NOK currently near 10.05) apparently needs some additional good news to regain overcome the EUR/NOK 10 barrier.