Analysis: Bank of England Likely To Swing Dovish MonPol Surprise

By Sophia Rodrigues

The Bank of England is likely to boost Quantitative Easing by more than expected and accelerate the pace of purchases as existing downside risks to economic outlook is expected to worsen further due the second lockdown.

The decision is due later Thursday.

The BOE might also consider tweaking interest rates, without taking the policy rate to negative. Additionally, it is likely to refine its forward guidance to includes date-based guidance to complement the existing event-based guidance.

Market expectation, according to Reuters, is for asset purchase program to be boosted by 100 billion pounds. But the BOE could announce a bigger increase, and an increase is the rate of bond-buying.

After an accelerated rate of purchases prior to June, the BOE slowed the pace in response to improved market functioning, and further reduced it in August. At this pace, the BOE’s expectation is to complete the current program around the turn of the year.

With risks for the economy growing, the BOE would likely be aiming to push yields lower, and one way to do this is by not only announcing a larger-than-expected increase in the APF but also faster pace of buying.

The BOE could also expand the range of assets it would purchase from just gilts and corporate bonds. Non-Financial commercial paper is one instrument that would be on the BOE’s radar. Currently, purchase of CPs is being done by the BOE as an agent for HM Treasury but it could do it under its own APF.

Another monetary policy decision could be around interest rates with the possibility of cutting the Bank Rate to zero. Since the BOE follows a floor system, it would mean the de facto policy rate which is the rate paid on deposits would be zero, and could lead to short-term interest rates falling below zero.

Adding a date-based forward guidance is also a possibility, based purely on the global trend, and one that the BOE needs to adopt too.

The BOE’s current guidance reads, “The Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”

Like the Bank of Canada, the BOE could clearly state it won’t increase interest rates until a particular date like end-2022 or end-2023.