MNI ANALYSIS: BOE Cuts QE Unwind Threshold; Eyes Slow Cutback

By David Robinson and Jamie Satchi

     LONDON (MNI) - The Bank of England's Monetary Policy Committee (MPC)

announced Thursday that is has lowered its quantitative easing unwind threshold

and that the pace of attrition of its gilt mountain would be gentle, suggesting

that Bank Rate is going to remain the active policy instrument.

     The MPC's new guidance on QE unwind states that it would not start to

reduce the stock of purchased assets, at core stg435 billion of gilts, until

Bank Rate reached 1.5% rather than the 2.0% level it had previously cited. Once

the sales start, the thinking is that there will be a pre-announced, extended

period of reductions with Bank Rate used as the active tool to respond to shifts

in the economic outlook.

     "Any reduction in the stock of purchased assets would be conducted over a

number of years at a gradual and predictable pace," the minutes of the MPC's

June meeting said.

     By implication, if the pace is predictable over a number of years then QE

unwind is not going to be adjusted to reflect low level changes in the economic

outlook. Rather, Bank Rate could be left on hold, raised or even cut as the

asset sales go ahead, with policymakers factoring in the impact of the

anticipated sales on the gilt, and other associated, yield curves.

     --MATURITIES AND SALES

     The reduction in the gilt mountain will be achieved through a mix of

allowing the government bonds to reach maturity and selling them back to the

market.

     With Bank Rate on the sterling overnight curve only reaching around one and

a quarter percent over the next three years the 2.0% level looked unattainable

but the 1.5% level is within touching distance of the market curve.

     With the MPC believing that the effective zero lower bound (ZLB) has moved

down to close to zero, but still positive, compared to its earlier estimate of

0.5%, the typical tightening pre-crisis tightening cycle of 150 basis points

would allow easing to be completed from 1.5% without having to restart QE.

     --FIRST INSIDER HIKE DISSENT SINCE 2011

     The big news in the June minutes, other than the QE unwind shift, was the

Chief Economist Andrew Haldane voted for a hike.

     This makes him the first one of the five insiders on the MPC, the full time

Bank executives rather than the externals, to dissent in favour of a hike since

his predecessor Spencer Dale did so in February through July 2011.

     The fact Dale's run of votes for a hike did not culminate in the majority

on the MPC backing a hike, with the first increase in Bank Rate only coming in

November 2017, shows there is no cast iron guarantee that Haldane will end up on

the winning side.

     Of the two others who backed a hike, Ian McCafferty will leave after the

next meeting, in August, and the majority expressed no view on whether an August

hike is now more likely or not.

     Nevertheless, Haldane's move, and the belief on the MPC that the weakness

in first quarter growth was temporary, does leave the door wide open to an

increase at the next meeting.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MX$$$$,M$$BE$]