The Bank of England held a regular meeting today and decided to leave parameters of the monetary policy unchanged. No one expected changes, but markets wanted to get some clues about possible extension of the QE program. As you may know BoE launched the program in March, the planned volume of purchases was 200 billion pounds with unspecified timeline of purchases. Not as much as in the US or Eurozone, but quite enough given the much smaller size of the gilts market.
In the course of subsequent government response, economic developments and response of the financial market to the actions of the Central Bank, it became clear that BoE may need to extend the program. The chances for this are being revised and, in my opinion, should be revised even higher. I would like to consider four main factors which support the case that BoE will decide to expand the program in June or even earlier:
- The expansionist paradigm of the world Central Banks, hiding under plausible name “coordination of fiscal and monetary policies.” More recently, the global Central Banks have signaled their willingness to follow this paradigm. It consists in the fact that if the government plans to carry out fiscal stimulus financing it with debt increase, then the central bank should provide the opportunity to raise as much money for its debt as possible, by signaling that it is ready to be a guaranteed buyer of assets in the amount of N (which is basically QE itself). Actually, this is the coordination mechanism – the central bank helps the government sell its debt as expensive as possible and make its servicing as cheap as possible;
- An updated economic recovery scenario from the Bank of England: GDP is expected to fall by 30% in the second quarter, which exceeded the forecasts of many pessimists in the market. The Bank of England made it clear that the pandemic dealt a very strong blow to the economy. The forecast increases the chances that fiscal stimulus will be expanded and the number of corporate bonds that will need to be supported may also increase. This may require additional support from the Central Bank in the form of QE.
- The Department of Debt Management said earlier that it was going to issue additionally 180 billion pounds of gilts from May to June. Recall that at the current pace of purchases, the Bank of England will likely complete the program by the end of June. Therefore, if the Central Bank does not give a signal about expansion of the program, this creates risk of a jump in yields on the government debt.
- Voting details: two committee members have already spoken in favor of expanding the program by 100 billion pounds. Next in line are the other participants.
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