UK faces two-sided risks to economic recovery, but those risks are declining as time goes by
Toolkit decisions should not be interpreted about signal of future policy path
Negative rates contingency planning implies nothing about our intentions in that direction
Contingency planning for negative rates does not imply it is our chosen policy tool
QE is set to run its course at the end of the year
Covid has been both a demand and supply shock to the economy, and the recovery, therefore, has to be in both elements. Absent a dual recovery, dealing with the issues that arise will be more difficult.
Longer-term scarring damage to the economy will be more limited than in some past recessions, but there will most likely be structural change
Important to boost supply capacity to raise the sustainable rate of growth.”
Important to emphasize the role of the forward guidance that the MPC has adopted, and the announcements made a month ago on so-called toolbox issues.
Far from clear whether or to what degree changes to the economy during covid will persist post-covid and therefore what will be the longer-term impact on the economy.
My best guess is we will see some persistence of structural changes of the economy under covid, not full persistence but not a full reversion to pre-covid either.
Impact of latest virus restrictions appears less than that in spring last year
Our best guess is GDP over Q4 was flat to slightly down
Mobility indicators are down more than in autumn, but less than in spring
Expects Q1 output to be weaker than November forecasts
Negative rates are a controversial issue
There are a lot of issues with negative rates
No country has used negative rates in 'retail' end of the financial market
Transmission of negative rates depends on banking system
BOE is doing a lot of work on whether negative rates are practical
There are good reasons to think we're in a world of low interest rates for a long period of time
Outlook for interest rates hinges on productivity growth
Not yet at a point where we can reach a conclusion on negative rates
There is a risk that negative rates end up being counterproductive
Outlook for monetary policy is skewed towards adding further stimulus
QE is probably less potent now than in March
Risks are skewed towards even larger job losses
Difficult to see a scenario where all furlough workers are reintegrated seamlessly
The speed of the recovery is likely to be slower while the virus remains a concern
UK recovery in Q3 is a little bit ahead of expectations
The economy can be viewed as glass half-full or half-empty
Labour demand is weak, unemployment is higher than reported number
Investment is also very weak, but housing market is strong
We will do everything we can to support the UK economy
We have looked very hard at scope to cut rates further
That includes negative interest rates
Concluded that negative rates should be in the toolbox
We do not intend to take any action to tighten policy until there is very clear evidence of significant progress to achieve 2% inflation target sustainably
Like the Fed, BOE is flexible in returning inflation back to its target
The economy’s faster-than-expected rebound in the last few months has reflected a benign window in which large fiscal support has coincided with the relaxation of lockdown measures and low infection rates. This window may now be closing.
Unemployment is likely to rise significantly in coming quarters as the furlough scheme winds down and workforce participation recovers.
The strength in money growth is an indication of the exceptional level of fiscal and monetary policy support in recent months. It is unlikely to translate into excess spending given the economic impact from Covid-19.
Looking forward, I suspect that risks lie on the side of a slower recovery over the next year or two and a longer period of excess supply than the forecast in the August MPR.
If these risks develop, then some further monetary loosening may be needed in order to support the economy and prevent a persistent undershoot of the 2% inflation target.
Yields in the gilt market are extraordinarily low
Trends over many years have pushed down rates
We are not actively planning for negative rates
We are using tried and test policies such as QE
Important to stress that negative rates are now in the toolbox
Financial structure is a key conditionality for negative rates
BOE can support the transition by keeping rates low
Massive programme of asset purchases has been the right thing to do.
Central bank independence should not be called into question by COVID-19.
Financial system mustn’t become reliant on these extraordinary levels of central bank reserves.
Current scale of central bank reserves mustn’t become a permanent feature.
Elevated balance sheets could limit the room for manoeuvre in future emergencies.
As economies recover, it’s likely that some of the exceptional monetary stimulus will need to be withdrawn, including by reducing reserves.
CNBC reports that according to Deputy Governor for Monetary Policy Ben Broadbent, the U.K. may be headed toward negative interest rates at impending Bank of England monetary policy meetings.
The BOE's Monetary Policy Committee (MPC) voted to hold interest rates at a historic low of 0.1% last Thursday, having cut rates twice from 0.75% since the start of the coronavirus pandemic.
"The committee are certainly prepared to do what is necessary to meet our remit with risks still to the downside," Broadbent told CNBC on Tuesday.
"Yes, it is quite possible that more monetary easing will be needed at the time."
Along with the two previous rate cuts, the Bank has also announced £200 billion of new quantitative easing, bringing its bond buying program to a total of £645 billion.
We will continue to come up with appropriate responses
BOE is clearly committed to take action when needed
Appropriate that BOE continues with aggressive pace of QE for the moment
We will take stock of that, there's still another meeting before QE completion
Information about lifting lockdown measures will be material to June discussions
The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. In that context, its challenge is to respond to the severe economic and financial disruption caused by the spread of Covid-19.
At its meeting ending on 6 May 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%.
The Committee voted by a majority of 7-2 for the Bank of England to continue with the programme of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to take the total stock of these purchases to £645 billion.
Two members preferred to increase the target for the stock of asset purchases by an additional £100 billion at this meeting.
The spread of Covid-19 and the measures to contain it are having a significant impact on the United Kingdom and many countries around the world.
Activity has fallen sharply since the beginning of the year and unemployment has risen markedly.
Economic data have continued to be consistent with a sudden and very marked drop in global activity.
Oil prices have been volatile.
There have, however, been tentative signs of recovery in domestic spending in China, and this is likely to be echoed in other countries that have started to relax Covid-related restrictions on economic activity.
Financial markets have recovered somewhat over recent weeks and risky asset prices have picked up from their lows in mid-March. This in part reflects the actions taken by authorities in the United Kingdom and elsewhere. Global financial conditions have, nevertheless, remained tighter than prior to the outbreak of Covid-19.
The timeliest indicators of UK demand have generally stabilised at very low levels in recent weeks, after unprecedented falls during late March and early April.
Payments data point to a reduction in the level of household consumption of around 30%.
Consumer confidence has declined markedly and housing market activity has practically ceased.
CPI inflation declined to 1.5% in March and is likely to fall below 1% in the next few months, in large part reflecting developments in energy prices.
Growth has slowed markedly over the last year, both overseas and here.
In the UK, the economy has barely grown since the first quarter of last year and the YoY growth in GDP has fallen below 1% for the first time since 2012
It probably will be appropriate to maintain an expansionary monetary policy and also to possibly cut rates further
Neutral level of interest rates may have fallen further over the last year or two
Monetary policy space is limited
Risk considerations favour a relatively prompt, aggressive response to downside risks
Most likely outlook is a further period of subdued growth
Brexit uncertainty may continue, weigh further on the economy
Bank of England policymaker Silvana Tenreyro said she will be inclined to vote for a cut in interest rates, if the economy does not pick up this year as the central bank forecast in November.
The BoE's forecasts assumed that the Britain would move towards a deep free trade agreement with the EU this year, and that the recent global economic uncertainty quickly unwound.
"The risks to these assumptions are largely to the downside," Tenreyro said in a speech at the Resolution Foundation think tank in London.
"If uncertainty over the future trading arrangement or subdued global growth continue to weigh on demand, then my inclination is towards voting for a cut in Bank Rate in the near term," she continued.
Structural forces unrelated to monetary policy are likely to keep rates low
BOE unlikely to be able to cut rates as it did in the previous downturn
BOE analysis rules out taking rates into negative territory
Does not believe that a recession is overdue
Not much room for the UK gilt yields to fall much further, so more QE unlikely to provide much more stimulus.
BOE firepower is less than before previous recessions.
If you change BOE 2% inflation target, could create higher perceived risk that it will be changed again in future.
Helicopter money could put central bank independence at risk.
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