MNI STATE OF PLAY: UK, US SpendingTilt Against BOE Stimulus

The Bank of England Monetary Policy Committee will have its first chance to debate the impact of the UK budget and the U.S.'s USD1.9 trillion fiscal stimulus package at its meeting on Thursday, with the chances for near-term easing receding and a cut likely to the Bank's jobless forecast in May.

Independent members who have been sympathetic to the case for further easing are already on the back foot, with their preferred policy tool, negative interest rates, still a work in progress with banks instructed to be ready for them by August.

The fiscal packages weigh against easing, and the BOE looks set to leave the policy rate unchanged at 0.1%, and the target stock and the pace of asset purchases unchanged at the meeting. Nor is news likely on the review, announced at its last meeting, of its existing strategy for eventual tightening, which is currently for any unwind of quantitative easing only to begin once Bank Rate his 1.5%.

In the March Budget the furlough scheme, which provides income for economically inactive employees, was extended from end April to end September, beyond the point lockdown restrictions are scheduled to be lifted. The official fiscal forecaster, the Office for Budget Responsibility, cut its prediction of the peak jobless rate to 6.5% at the end of this year from 7.5% and the Bank looks set to follow suit at its next forecast round.

"I would expect, much as the OBR have done, that we would have a lower profile of unemployment, certainly in the near-term and I think probably it will be lower throughout (the three-year forecast)," Governor Andrew Bailey said at a Resolution Foundation event on March 8, although he added that he anticipated a lot of debate among MPC members.

RISING YIELDS

Minutes of the March meeting, which will be released alongside the policy decision, will also offer MPC members' initial thoughts on the impact of the likely impact of the American Rescue Plan.

The OECD, which was quick off the blocks in updating its forecasts in response to the U.S. package, foresaw significant rises in output around the world with UK growth assumed to be around 0.5 percentage point higher, adding to upward pressure on interest rates.

Bailey said that his assessment was that the rise in yields was, so far, "consistent with the change in the economic outlook … but we watch this very carefully."

The Bank has, since first launching QE, stressed that the stock rather than the flow of purchases is key with the only qualification that pace matters when markets are illiquid, justifying the 'go big, go fast' approach during the early Covid shock.

Deputy Governor Ben Broadbent stressed at a Feb. 24 appearance at the Treasury Select Committee that aside from last March the MPC has not taken a stance over the pace of asset buying and it would require a shift in approach for it to speed up buying in response to the rise in yield curves.

"Now that we are out of the immediate crisis conditions … the pace is not so important … it would take significant news for us to change that pace. My expectation, this is not a promise, is that we would maintain it roughly as it is," Broadbent said.

The pace of asset buying has slowed from GBP13.5 billion a week of at the start of the shock to GBP4.4 billion. While the MPC can provide directions as to purchases, operational details are left to Bank staff.