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BoE Review - June 2020: Stock vs Flow

MNI (London)

MNI Point of View:

The BOE delivered the £100bln of QE that had been expected but purchases are to be carried out at a much slower pace than market participants had expected. 18/23 analysts prior to the decision had expected at least £100bln QE with no change to the pace of QE purchases from the £13.5bln per week, but the Bank stated that purchases would be cut to £6.9bln per week until the next MPC meeting in August (or lower if you exclude the reinvestments). Purchases are set to slow further from August with the entire programme being spread over the rest of the year (the BOE stated that purchases were expected to be completed "by the turn of the year".

Markets reacted negatively to the announcement with gilts selling off and 10s30s in particular bear steepening. In our view there are two reasons the BOE surprised the market. First, the MPC was a lot more optimistic on the nearterm economic outlook than the Bank's scenario analysis in the May MPR would suggest. So the Bank has effectively gone from a more negative view of the economy than the market consensus to a more positive view of the economy. Despite some comments from MPC members prior to the meeting that suggested the outlook was not quite as bad as had been pencilled in the Bank's more optimistic tone caught markets off guard. This was also apparent in Chief Economist Andy Haldane's dissenting vote in the expansion of QE as he thought the recovery was on track with current stimulus already.

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