Paul Jackson, Global Head of Asset Allocation Research at Invesco, shares this thoughts ahead of the Bank of England monetary policy decision this afternoon.
Bank of England June 2021 MPC Preview
“The Bank of England’s Monetary Policy Committee (MPC) has not changed its policy settings since 5 November 2020 (when the total bond purchase target was increased from £745bn to £895bn) and Bank Rate has been unchanged since 19 March 2020 (when it was reduced to 0.1%). We doubt that any changes will be made at the meeting on 24 June 2021 but will be keeping an eye on changes of tone and voting patterns.
“Though the current policy settings are unprecedented (in its longer than 300-year history, BOE policy rates had not gone below 2% until the Global Financial Crisis but have not since gone above 0.75%), MPC decisions to leave interest rates unchanged have been unanimous (9-0) since the reduction to 0.1% in March 2020. Indeed, the only dissension in recent meetings was the vote to lower the bond purchase target to £845 by Chief Economist Andy Haldane at the last meeting (6 May). As an aside, this will be his last meeting as a member of the MPC.”
A rapid escalation of inflationary pressure
“Andy Haldane is concerned about inflation but the MPC as a whole has so far been more relaxed. The minutes of the last meeting stated that they expect CPI inflation to go slightly above the 2% target towards the end of 2021 but to then fall back and stay around that target over the medium term. Since then, we have learned that CPI inflation was 2.1% in May (up from 1.5% in April) and that core CPI inflation was 2.0% (up from 1.3%).
“This suggests a more rapid escalation of inflationary pressure than had been expected by the MPC, so it will be interesting to see if their opinions have changed and whether other members of the MPC join Andy Haldane in wanting to lower the ceiling on total bond purchases. It should be noted that if gilt purchases continue at the recent average weekly rate, we reckon that a reduced £845bn ceiling would be hit in about six weeks. Hence, such a policy change would imply a rapid change in policy, probably towards a slower pace of purchase and then cessation of purchases.”
Looking at the forecast
“We suspect the language around the short-term inflation outlook may be adapted but doubt there will be any change to the medium-term forecast. On that basis, it is possible that other members of the MPC will join Andy Haldane in voting for a reduced asset purchase target, but we believe the majority view will be to maintain the target at £895bn.
“As interest rates are unlikely to be increased until asset purchases have ceased, we doubt that any member of the MPC will vote to increase rates (Overnight Index Swaps suggest market participants expect no rate hike during the next 12 months). Hence, we expect no policy change to be announced but will be closely following changes in language and voting patterns. The more MPC members that vote with Andy Haldane, the more upward pressure will be applied to gilt yields and sterling, in our opinion.”