BOE Preview – Awaiting Updates on Negative Rate Policy and Economic Projections

There are several things to watch for this week’s BOE meeting: 1) updates on the review of negative interest rate; 2) adjustment to QE; 3) economic projections. All policy measures will stay unchanged this week with the Bank rate unchanged at 0.1%, and the size of the asset purchases (QE) at 875 pound.

Since the last meeting, the UK entered a national lockdown as a new variant found in the country is 50-70% more transmissible. The lockdown could remain there for the rest of the quarter, if not longer. On a positive note, the vaccination progress remains on track. We expect BOE to revise lower GDP forecast for 1Q21 to reflect economic impacts of the lockdown.

Yet, economic data released over the past month were not too pessimistic, allowing policymakers to keep the powder dry this month. The unemployment rate climbed higher to 5% in the three months through November, from 4.9% a month ago. Yet, the jobless rate came in less than expectations of 5.1%. Claimant count’s number of unemployment increased +7K in December, less than consensus of +35K and +64.3K in November. While staying subdued, headline CPI improved to +0.6% y/y in December, from +0.3% a month ago. This came in better than expectations of +0.5%. Core CPI climbed higher to +1.4% y/y, from +1.1% in the prior month. The market had anticipated a +1.3% growth. On the monetary policy outlook, possibility of negative interest rate is under the spotlight. the CEO of the Prudential Regulatory Authority (PRA), Sam Woods, suggested in January that updates on the consultation would be published with the February Monetary Policy Report (MPR). We expect BOE to leave the door open for negative interest rates. Yet, there does not seem to be a consensus among members regarding its implementation. External and internal members remain divided over the economic outlook. While external members appear more dovish, internal ones are about upbeat about the economic outlook and do not expect negative rates will be needed. External members like Michael Saunders and Silvana Tenreyro have endorsed negative rates as a tool if more easing is needed.

Among those in the internal camp, Chief Economist Andy Haldane projected that the economy would be recovering at “a rate of knots” from the second quarter, while Governor Andrew Bailey has recently noted that it might be premature to implement negative rates. For instance he suggested that there are “lots of issues” with negative rates and policymakers have “not actually discussed” the issue yet. The fact that internal members have a majority on a committee of nine suggests that the hurdle for adopt this tool is high.

Elsewhere, some minor adjustment could be made for QE. In November, the central bank increased the size of QE, by GBP150B, to 870B. The weekly purchase is set at 4.4B pound per week initially. We expect BOE to extend this pace of purchase until May.