MNI PREVIEW: More BOE QE Expected, But Stimulus May Be Slight

--BOE MPC Likely To Avoid Shock Of Letting Asset Purchases End 

--Impact of Fresh QE On Yield Curve Seen Slight; Hampering Stimulus

By David Robinson

     LONDON (MNI) - The Bank of England is expected to increase its asset

purchase programme at its meeting on Thursday, with a fresh round of gilt buying

likely needed to avert tightening in financial conditions.

     The modal market expectation is for a fresh GBP100 billion of quantitative

easing, and, if the Monetary Policy Committee's policy announcement at 1200 BST

disappoints, yields could rise. But extra QE may add little stimulus.

     If the MPC provided more than GBP100 billion the effects may not be large,

particularly if it offered little guidance on future policy. Pushing long rates

down further would be a tough ask with the rate on the benchmark 30 year bond

just 10 basis points from its historic low, and markets might just assume more

bond buys would lead to a sharper tapering of the programme at its conclusion.

     The GBP200 billion of gilt and sterling corporate bond buys programme

launched in March, and set to be completed by early July, was far larger and

faster than any it carried out in the Global Financial Crisis, hammering the

yield curve flatter.

     --ONGOING QE

     With no July meeting, the MPC has to increase QE this month if it is to

stay as a buyer in the gilt market until it can reassess the economic outlook

and refocus on the likely shortfall in aggregate demand at its August meeting,

by which time it will have completed its quarterly forecast round.

     So far, the Bank's Covid response has focussed on preventing monetary

tightening and helping ensure firms have the funding to avoid corporate

failures. The next phase, assuming the easing of lockdown leads to no

market-destabilising spike in Covid infection rates, will be for the MPC to

focus on assessing the shortfall in demand and what it can do to tackle it.

     The June MPC minutes could also point to a review of the Bank's idea of the

location of the effective lower bound for Bank Rate, currently at 0.1%.

     --DOOR AJAR

     The committee will likely want to continue to publicly leave the door open

to setting a negative interest rate, without building up hopes that this will

come any time soon. This approach has helped push down on rate expectations

without the Bank having to wrestle with the complexity of actually moving into

sub-zero territory.

     The MPC could also tweak policy by signalling slower asset purchases,

removing the "as soon as operationally possible" wording or by using guidance to

clearly signal it could provide more stimulus in coming months.

     The most likely outcome on Thursday is for all members to vote for fresh

QE, with all those who backed delay in May agreeing that further action may be

necessary. There could be dissenting votes over the amount.

     At its June meeting two MPC members, Jonathan Haskel and Michael Saunders,

backed more QE saying "it would be preferable to announce now that the current

pace of asset purchases would be maintained at least until the time of the

August Monetary Policy Report, in order to limit further tightening in financial

conditions."

     In refusing to tie the pace and scale of asset purchases to the pace of

gilt issuance, the MPC has clouded views on how fast and far it is likely to go,

and whether more aggressive QE would be offset by faster tapering.

     Market participants have been wrongfooted in the past. Many analysts

expected a new asset purchase programme to be unveiled at the May meeting but

the market shrugged off the surprise news of unchanged policy on the assumption

that the MPC would act in June.

     Now the MPC is expected to deliver.

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

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