Oliver Blackbourn, Portfolio Manager on the UK-based Multi-Asset Team, responds to the Monetary Policy Committee’s (MPC’s) dovish view on prospects for the UK economy, although risks remain skewed to the downside.

 

While the Bank of England did not change its monetary policy stance at today’s meeting (on 7 May 2020), it is surely only a matter of time before they decide to. The 7-2 split on whether to increase asset purchases indicates a continued dovish bias from certain voting members. With the Bank hoovering up gilts equivalent to those issued since the additional £200 billion in quantitative easing was announced, it will run out of firepower to support government spending within months. Therefore, expectations will be high for an increase in the purchase target at the next meeting in mid-June.

Free from the legal and structural challenges confronting the European Central Bank and Riksbank, the Bank of England has moved hand-in-hand with the UK Treasury in dealing with the current crisis. With the Bank pointing out that the risks are still skewed to the downside, we expect that close partnership to continue through the summer. The Bank’s “illustrative scenario” models a rapid rebound in the economy; however, there remain significant question marks around how quickly spending will return to normal. The British population has shown strong support for the lockdown measures, but this may also increase the time before we return to a more laissez faire, free-spending attitude.

The lack of additional easing was good for sterling in the moments after the announcement. The pound continues to behave like a risk asset, tracking the broad moves in equity markets since late last year. After suffering in the liquidation phase of the March sell-off, it has bounced strongly with equities. However, with the Brexit trade talks back under way and the first deadline for an extension looming in June, sterling could use a strong bounce in growth, like the 15% figure that the Bank outlines for 2021.