The BoE’s monetary policy decision, meeting minutes and forecasts were all released at 7am this morning.
As expected in a unanimous decision (9-0) the BoE left both the UK’s interest rate and its QE program unchanged at 0.1% and £745bn respectively.
However, for us the meeting minutes and revised economic forecasts (covering growth and inflation) were of greater importance as this provides clues into the thinking of the nine policymakers – especially in the context of using negative interest rates.
As we have previously highlighted in our commentaries, while the low point for the UK economy is now thankfully behind us, the UK economy still needs to be supported, especially given the government has started to taper its job retention (furlough) scheme. This tapering is likely to result in a significant rise in unemployment in the coming months – and unemployment could unfortunately, easily hit 3m (a level last seen in the 1980s), given coronavirus cases are on the rise again in some parts of the UK, resulting in localised lockdowns.
Although the BoE admitted that the UK economy contracted less than they expected during Q2 (helped no doubt by the government’s furlough scheme which has supported employment and consumer spending), they also said they don’t expect UK GDP to fully recover to pre-coronavirus levels until the end of 2021: they are forecasting GDP to contract 9.5% in 2020 and expand 9% in 2021 and then a further 3.5% in 2022. This would suggest to us they expect the recovery to resemble a ‘Nike Swoosh’ shaped recovery (i.e. still a strong recovery, just slightly slower than a ‘V-shaped’ recovery).
Annoyingly, the BoE fell short of providing definitive clues on the outlook for monetary policy, simply saying they “will keep under review the range of actions that could be taken” to meet its remit – and disappointingly talked about when interest rates might rise (which it now expects to be within the next 2 years, as it expects inflation to start increasing towards its 2% target).
Consequently, the pound has strengthened this morning to $1.318 – and given around two-thirds of the FTSE-100’s total revenue is derived from abroad, a strong pound is bad for the FTSE-100 as it lowers returns for exporters and the value of overseas earnings, hence the FTSE-100 has opened this morning down just over 70 points, or 1.20%.
However, our commentaries have consistently stated that there is an obvious need for more monetary stimulus and as a consequence, we strongly believe that the BoE is wrong – and in fact will need to act before the end of the year, if not before the end of the summer, with an interest rate cut and/or a significant increase in QE, especially as last month’s Summer Statement from the Chancellor of the Exchequer, Rishi Sunak, reduced VAT on hospitality from 20% to 5%, which considerably increases the UK’s deflationary pressures (even before this VAT cut, inflation was well below the BoE’s target of 2%).
The weekly US jobless claims data is due this afternoon and we will discuss this in tomorrow’s commentary as the recent resurgence in coronavirus cases and the subsequent halting of the lockdown easing in a number of US states is likely to have had a detrimental impact on the employment market. However, any bad news should focus minds in Washington and could help to ensure a new stimulus deal is reached sooner rather than later.