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BoE Review: December 2020 - It's All in the Detail

The BoE yesterday extended the TFSME (which provides banks with cheap funds for lending to SMEs) but left the pace of QE and buckets used unchanged. However, the main message is policy is remaining constant until we have more clarity on Brexit. We discuss the key highlights and look at how this has changed the consensus view for the February meeting.

For the full document see:

MNI BoE Review - Dec20.pdf

  • Yesterday's Monetary Policy Summary and Minutes from the December MPC meeting were fairly uneventful. Q4 GDP growth is expected to come in a bit higher than the November MPR suggested but the restrictions after lockdown are expected to be more severe than the MPR had expected so Q1 growth is expected to come in weaker. Medium-term there is little change to expectations. MPC members agreed that the start of vaccinations reduced the downside risk to the outlook but there was debate over whether the vaccine altered the central projection for the rebound or not. Now that a vaccine timeline is finite will people delay going out and spending money until they have received the vaccine, knowing that it will be a finite amount of time they will need to stay home? Or is the fact that people are starting to get vaccinated enough to convince some people who would have otherwise saved more money that the economy will recover and reduce incentives to save? There seems to be disagreement on these questions among MPC members. As expected, the Bank kept with current government policy that a deal with a relatively smooth transition was expected.
  • The pace of QE was announced as largely unchanged, with each operation now GBP1.48bln (rather than the GBP1.473bln previously). We had been hoping for some tweaks to the QE buckets, with an adjustment to the minimum maturity gilt eligible for the short bucket. This did not come to pass, but the Minutes and market notice both stated that the technical parameters would remain under review. This suggests to us that we will see this change at some point, but the MPC didn't think it warranted the change now, perhaps for concerns of signalling ahead of Brexit (the faster the pace of QE, the more urgent it becomes to change the buckets).
  • The only minor surprise was an extension to the TFSME scheme (which provides banks cheap funding for lending to SMEs) from the end of April 2021 to the end of October 2021.

For the full document see:

MNI BoE Review - Dec20.pdf

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