BoE Meeting: Why the Central Bank may Announce Extension of the QE?

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GBPUSD continued to see narrowing buyers’ surplus on Tuesday after failed retest of the April peak at 1.26500. Selling pressure has noticeably increased due to overall better shape of USD and expectations that the Bank of England will pledge to increase purchases on the government bond market to help investors digest coming glut. Monetary policy settings are not expected to change in May.

Aside of the fallout of the Covid-19 pandemic, retail sales behaved weakly for most of 2019, indicating a reduction in the basis of part of consumer spending:

This suggests that the coronavirus hit the economy when it was not in the best shape and ceteris paribus it should be more costly for the UK to deal with the fallout.

British government is now forced to loosen fiscal discipline in order to be able to finance sharply increased expenditures. This implies that public debt will grow faster. The support of the central bank is very helpful here, because without a guaranteed buyer in the market, a signal of supply growth will lead to the sale of bonds and an increase in yield to maturity. Borrowing will become more and more expensive, which of course creates the risk of fiscal policy moving to unsustainable trajectory.

In March, the Bank of England announced $ 200 billion QE program. At the current pace of purchases, the Central Bank will complete the program around the end of June. That is, very soon. Nevertheless, it is completely unclear how long and with what intensity the coronacrisis will last, therefore there is uncertainty in the reaction of the government (including debt trajectory). If the Central Bank does not announce expansion of the QE in near future, it risks stirring rout on the bond market so buyers will give less and less money for the upcoming issue of UK debt. On the other hand, a signal of an increase in QE will reassure investors and will allow the government to continue cheap borrowing. So, risks are biased towards the announcement of QE extension, which is a negative factor for the pound.

It should be borne in mind that the UK takes the second place in the number of deaths from Covid-19. The number of victims in the country since the outbreak amounted to more than 27 thousand.

Britain introduced restrictive measures later than other European countries, which puts it in a position where it will also quit quarantine later.

The head of the Ministry of Health of the country said that measures of social distancing could remain until the end of the year.

Despite the fact that Covid-19 has somewhat overshadowed the issue of divorce with the EU, it continues to be a factor of weak pound. Negotiations have stalled due to disagreements over EU access to Britain’s fishing waters. If countries fail to agree before June, this will essentially mean leaving the EU without a deal.

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