Bank of England Surprises With £50BN More QE Than Expected, Sterling Jumps Anyway

Ahead of today’s FOMC decision, where Powell will find himself scrambling if he hopes for Congress to pass another multi-trillion fiscal package now that gridlock is in the cards for at least 2 years and Republicans revert to once again being “fiscal hawks” (full preview here), the Bank of England jumped into the monetary pool early when this morning it increased its already huge bond-buying stimulus by a larger-than-expected 150 billion pounds ($195 billion), more than the 100 billion pounds expected, as it braced for more economic damage from new coronavirus lockdowns not to mention more damage from Brexit (yes, that’s still going on).

The Monetary Policy Committee voted unanimously to maintain #BankRate at 0.1% and to inject an additional £150bn into the economy through quantitative easing. pic.twitter.com/as5jKjo0a0

— Bank of England (@bankofengland) November 5, 2020

The BoE kept its benchmark Bank Rate at 0.1%, as expected and made little mention of negative rates while a consultation with banks over the practicalities is underway.

The increase in the size of the BoE’s asset-purchase programme took it to 895 billion pounds, 50 billion pounds more than expected by most economists. The central bank said that would give it enough firepower to stretch its buying of government bonds through to the end of 2021, but the purchases could be sped up if needed.

On the day England began a four-week lockdown to curb a second wave of COVID-19, the BoE said it was still looking into the pros and cons of taking interest rates negative, but gave no update on the process.

“If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit,” the BoE said as it cut its growth forecasts, and now expects the Britain economy to shrink by a record 11% in 2020 overall, more than the 9.5% it had forecast in March; the outlook for 2021 was also cut.

“The outlook for the economy remains unusually uncertain,” the BoE said, pointing to the COVID-19 crisis and the still unresolved trading relationship between Britain and its closest trading partners in the European Union after Jan. 1.

The central bank now expects Britain’s economy to shrink by 2% during the fourth quarter and only exceed its size before the COVID-19 pandemic in the first quarter of 2022. Previously, it had predicted the end of next year. Unemployment is expected to peak 7.75% in the second quarter of next year, much higher than its most recent reading of 4.5%; GDP was likely to grow by 7.25% in 2021, weaker than a previous forecast of 9%.

But its two-year inflation forecast remained unchanged at 2%, the central bank’s target.

“Our view is that inflation will be closer to 1.5% by the end of 2022. That’s why we believe the Bank will still have to increase its policy support,” said Ruth Gregory, an economist at Capital Economics.

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There’s more to come: JPM analyst Allan Monks said that the prospect of weak inflation next year would pressure the BoE to do more, and that the likelihood of negative rates in the second half of 2021 was growing. As well as COVID-19, Britain faces the risk of a trade shock when its post-Brexit transition with the EU expires on Dec. 31.

So far, London and Brussels have failed to strike a new agreement. The BoE’s Monetary Policy Committee said trade would suffer even if there is a deal.

“The MPC’s projections are also conditioned on the assumption that cross-border trade falls temporarily in the first half of 2021 as businesses adjust to the new trading arrangements with the EU,” the BoE said.

Just like the rest of the world, the British economy has been supported by a surge in debt-fuelled spending by the government, and the BoE is buying up many of those bonds.

As Reuters report, finance minister Rishi Sunak is due to speak in parliament later on Thursday. His emergency spending and tax cuts have saddled Britain with its biggest budget deficit since World War Two.

While bond yields fell, the sterling rose against the dollar and the euro after the announcements suggesting that despite the upside surprise in QE, the market thinks this is still not enough as it pushes for even more QE and negative rates.