In the past two months, the Bank of England has cut interest rates to their lower bound; unleashed a further £200bn of quantitative easing; flooded the banking sector with cheap funding to help it keep lending to the real economy; and set up new corporate borrowing facilities – while also promising to finance state spending directly on a temporary basis.
This week’s meeting of the monetary policy committee is likely to be a quieter affair. Although some economists believe the central bank may eventually need to ease policy again to speed the UK’s recovery from a deep recession, most think it will hold fire on Thursday since financial markets have become calmer and most of the asset purchases already planned are still in the pipeline.
But the BoE’s new forecasts will be the most thorough assessment yet of how the lockdown is affecting the UK economy – and may offer clues on the likely timing of any further stimulus.
Here are four key questions for which investors will be seeking answers.
1. Will the BoE announce any new stimulus?
There is still an outside chance that the MPC could expand its asset purchase programme further, after saying at the end of March that it would be ready to do so if needed.
Several City economists have argued there is no clear need for it to do so immediately. Gilt markets have calmed since March and with the BoE’s gilts purchases running at around £13.5bn a week, it would take until early July to complete the £200bn of asset purchases already planned, leaving time for the MPC to assess the need for further stimulus next month.
By then, policymakers will know more about the government’s plans to ease the lockdown, and the extent to which economic activity is returning.
However, some do expect the BoE to act this week. Karen Ward, strategist at JPMorgan Asset Management, said it was “still very much unknown” how quickly life would return to normal – adding that with each extra month of lockdown carrying a fiscal cost of £35bn-£45bn, extending QE would be sensible.
2. How bad does the MPC think the impact of lockdown has been?
The BoE’s new forecasts will undoubtedly show the UK sinking into a deep recession in the second quarter. Andrew Bailey, the governor, and several MPC members have already signalled that the Office for Budget Responsibility’s scenario of a 35 per cent per cent quarter on quarter fall in gross domestic product is plausible.
But the BoE – thanks to its network of regional agents – will be able to paint a far more detailed picture of how businesses are coping with the shutdown, how it has affected jobs, and the state of household finances.
3. What kind of recovery does the BoE expect?
The key question is how much long-term “scarring” the BoE expects the economy to sustain – and how this affects the outlook for inflation.
Gertjan Vlieghe, an external MPC member, said last month that the priority for policymakers was to return the economy to its pre-virus trajectory as soon as possible.
But initial hopes of a V-shaped recovery have faded rapidly. Adrian Paul, economist at Goldman Sachs, said the lockdown could leave “a lasting legacy of bankruptcies and redundancies”, as well as profound shifts in households and companies’ behaviour, which could prevent the UK economy returning to its previous trend rate of growth.
A lot will depend on how long social distancing measures are needed and whether the UK manages to avert the risk of a second wave of infections. The BoE is therefore likely to downplay its central forecast, while setting out forecasts for growth and inflation in a range of different scenarios.
4. Does the BoE think the financial sector is coping?
Unusually, the BoE is set to publish an interim report on financial stability alongside its scheduled quarterly monetary policy report.
This will assess how the UK’s banking system is standing up to the strains of the past two months. It will also show whether the BoE thinks the steps it has taken to keep credit flowing to businesses and households are working – given the difficulty many companies have reported in accessing new loan schemes and the lack of any material drop in banks’ lending rates.
Samuel Tombs, at the consultancy Pantheon Macroeconomics, said one immediate option for policymakers would be to “turbocharge” the BoE’s Term Funding Scheme, which provides cheap funding for banks provided they keep lending to the private sector, helping small companies in particular.
This scheme now looks “miserly” compared with the European Central Bank’s equivalent offer to banks, which was made more generous last week, Mr Tombs said, adding that the BoE “could follow suit and pay banks to increase their lending to the real economy”.