MNI PREVIEW: More BOE QE But No More Radical Steps Yet

By David Robinson

     LONDON (MNI) - The Bank of England may increase the size of its asset

purchase programme at this week's monetary policy committee meeting but its

decision due on Thursday is likely to eschew any more radical policy options,

such as setting a negative policy rate or adopting yield curve control.

     The MPC announced on March 19 that it would raise its purchases of

corporate bonds and gilts by GBP200 billion, and with buys running at GBP13.5

billion a week it would hit this ceiling next month. Most analysts expect the

ceiling to be raised with debate focussing over whether the MPC does so this

month or next, with an additional GBP100 billion likely to be the least

surprising outcome.

     Following are key pointers to the MPC's decision:

     -The MPC's current approach, centred on bulk buying gilts, has worked

insofar as there has been heavy demand at Debt Management Office auctions and

yield curves are markedly smoother.

     This success will reinforce the MPC's wariness over experimenting with, for

it, more novel approaches, such as cutting the 0.1% Bank Rate into negative

territory or adopting yield curve control (YCC).

     -MPC member Gertjan Vlieghe came out against YCC in a question-and-answer

session at the Bank last month.

     "Personally, I am not persuaded about the merits of YCC over longer term

yields .. Long term yields can move higher for bad reasons (e.g. market

dysfunction) or for good reasons (e.g. improving economic outlook)," he said.

None of his colleagues have been publicly pushing for YCC.

     -The MPC's judgement has been that the reversal rate, at which further

attempted easing becomes contractionary, is close to zero but positive.

     At his confirmation hearing on March 4, new Governor Andrew Bailey, who

made his name working on financial stability, argued against setting Bank Rate

below zero, in part because a squeeze on banks' net interest margins "could see

some very negative consequences in competition terms."

     -The Monetary Policy Report will contain the Bank's first set of public

forecasts since the coronavirus shut down swathes of the economy.

     The Bank is likely to take the view that inflation will remain subdued

throughout the forecast period, falling below 1% near term before moving slowly

higher. MPC member Silvana Tenreyro said on Apr. 16 that while there were some

upward pressures on inflation from sterling weakness and a squeeze on supply

"the balance is leaning towards more deflationary pressures."

     The accelerated shift to lower cost online shopping, alongside the fall in

the oil price and rising unemployment and weaker earnings, are all likely to

ensure that inflation is projected to hold below the 2.0% target, facilitating

the MPC's addition of policy stimulus.

     -While surveys have found disagreement among market participants and

analysts about whether to expect more QE this month or next and over exactly how

much, a GBP100 billion QE extension would appear to be most likely, with no

significant change in forward guidance or messaging from Bailey and colleagues.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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