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BOE Preview – Response to Rising Yields in Focus

We expect BOE to vote 9-0 to leave the Bank rate unchanged at 0.1%. Meanwhile, the QE program will also stay at 875B pound worth of government bonds, and 20B pound of corporate debt. Despite contraction in the first quarter, policymakers should point to the post-pandemic recovery as driven by smooth vaccination progress and an expansionary government budget. The market will focus on policymakers’ response to the recent rise in bond yields.

On economic developments, GDP contracted -2.9% y/y in January, compared with consensus of -4.9% and December’s growth of +1.2%. The BOE anticipates the economy for 1Q21 would contract by -4%. On the job market, the number of payrolls declined -114K in the three months through to November, after dropping -88K a month ago. This also missed consensus of a -30K decline. The unemployment rate climbed +0.1 ppt to 5.1% during the period. Headline CPI improved to +0.7% y/y in January, up from +0.6% a month ago. Core CPI steadied at +1.4%.

While current inflation has remained mild, inflation expectations have soared recently. UK’s 10-year breakeven rate rose to 3.48%, the highest reading since 2008. The phenomenon is in line with other advanced economy as a result of the global reflationary theme. Rising inflation expectations have led to higher yields. UK’s 10-yield gilt yield reached +0.79% on Tuesday, more than doubling the +0.37% recorded on February 4 (the previous BOE meeting). Policymakers will likely respond to the developments. The market is closely watching whether they will react like the Fed (regard it as better economic confidence) or the ECB (ramp up asset purchases).

On the monetary policy, the BOE would leave the current measures unchanged. The central bank announced in November 2020 that the additional QE purchases will be completed by the end of 2021. As the balance sheet has reached 800B pound in the second week of March, BOE might have to slow the pace of purchases in coming months in to order to maintain the target.