BOE PREVIEW: Policy Seen On Hold; Focus On Covid Thinking

The Bank of England is seen leaving policy on hold at its August meeting on Thursday, with Bank Rate staying at 0.1% and the stock of asset purchases at GBP745 billion.

But, with fears of a Covid-19 resurgence intensifying, the BOE will have a chance to shed light on how it thinks things could unfold if the planned progressive easing of social distancing is reversed, potentially including a "dark scenario" in its quarterly Financial Stability Report.

The May FSR and Monetary Policy Report were both based on a single scenario, assuming a gradual lifting of social distancing measures over four months from early June.

The early stages of lifting the lockdown proceeded more rapidly than the Bank had expected, and the trough was less deep, with MPC member Silvana Tenreyro saying in mid-July that monthly GDP data suggested a reduction of nearly 25% in 2020 Q2, relative to the 2019 Q4 peak.

If the Monetary Policy Committee were simply to produce a similar central scenario to May, showing a less marked fall in recent economic activity, while still assuming a smooth re-opening of the economy, it would run the risk of being rapidly overtaken by events if Covid-19 does pick-up.

PLAUSIBLE 'DARK' SIDE

Instead, what the Bank could do is run a plausible adverse outbreak scenario as part of its assessment of the resilience of the financial sector in the Financial Stability Report. The MPR's central scenario could be switched back to a traditional projection, with clearly calibrated downside risks.

Assuming policy is left unchanged, another focus for markets will be whether the BOE publishes its assessment of whether the effective lower bound for Bank Rate is below zero, even as interest rate curves dip below zero.

Past precedent has been for the MPC to use its quarterly Monetary Policy Report (previously the Inflation Report) to publish work on such things as the lower bound and the neutral level of interest rates.

It may not yet be ready to go public with its views on the plausibility of taking rates below zero. If it did, it would be a surprise were it to conclude anything other than that such an option should be in the policy toolkit, while noting, as Bank Governor Andrew Bailey and colleagues have stressed, that any move to introduce it would require careful and extensive communication and plenty of preparation time for the banking sector.

The Bank will also hold a press conference, with details published at 1000BST.