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Morgan Stanley View Following the BOE MPR

BOE
  • On the BOE's forecasts MS say they "were surprised just how hawkish the Bank was on inflation towards the end of their forecast horizon". MS also said that "with the additional drag from Brexit, we expect a return to pre-Covid levels of output only in 2022" whereas the BOE look for end 2021.
  • "We struggle to see near-term catalysts that could drive a quick reversal to a more dovish tone from the MPC. Weak inflation in 2H20 will reflect noise from fiscal policy measures, and can be easily discounted. The rise in unemployment reported by the November MPC meeting is unlikely to be clearly on track to exceed the BoE's 7.5% forecast, since we expect the sharpest rise in unemployment only after the furlough scheme ends. Crucially, a strong 3Q20 looks very likely"
  • On negative rates MS notes that "the extensive box on negative rates in the MPR was studiously neutral ahead of the review's completion." MS adds "we don't think rates go negative in 2021…However, in our bear case - a disruptive Brexit, or a more negative COVID-19 scenario we would expect the Bank Rate to be cut to -25 bps in May and -50 bps in August 2021."
  • In MS' base case further easing "will likely come through more slowly than we previously thought." MS "still expect a further tranche of QE in…We also still expect a rate cut to zero - but we push back the timing to February, and drop our call for term funding at a negative spread, which looks too specific given the range of possible mitigants"
  • Despite seeing GBP100bln QE announced in November, MS notes "we think the Bank could move to a more flexible framework of continuing the weekly purchases at a pre-announced pace without announcing the exact ultimate size of the envelope, similar to the Fed."
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