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

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