The decision to extend asset purchases was taken despite fewer worries about the near-term outlook for economic activity.
However, the Committee are sounding more worried about potential longer-term damage to the economy from this crisis. To gauge the Bank of England’s next move, it will be crucial to watch labour market indicators. With the government’s furlough scheme now playing such a large role in the labour market, its unwinding and employers’ reactions to that will presumably play a key role.
As expected, the Bank of England kept rates on hold at 0.1%M and extended their asset purchase programme. They agreed to another £100bn of government bond purchases, which will take the total stock of assets to £745bn. They did, however, indicate a slowing in the pace of those gilt purchases given that, compared to the previous batch of quantitative easing (QE) in March, markets are not dysfunctional. They expect this next part of the purchase programme to be completed around the turn of the year.
What about corporate bonds? In terms of the existing programme, they note that purchases will continue “£5.8 billion of investment-grade corporate bonds had been purchased since March. In order to complete the existing programme of asset purchases, the Bank would continue to purchase corporate bonds, such that around £10 billion of these bonds were purchased by the end of the programme.”
The QE vote was close to unanimous at 8-1. Interestingly, the dissent was a ‘hawkish’ one from Chief Economist Andy Haldane who wanted to maintain the stock of purchases at £645bn. He argues that “The recovery in demand and output was occurring sooner and materially faster than had been expected at the time of the previous Monetary Policy Committee (MPC) meeting” and that the risks are more evenly balanced than in May.
Less pessimistic/fearful? Sort of: Beyond Haldane’s views, the majority of members agreed that recent demand and output data had not been quite as negative as expected. The minutes note that “recent developments suggested that the level of GDP in the second quarter might be 20% below its level in the final quarter of 2019, rather than the 27% included in the May Report” and that “recent payments and other high frequency data suggested that consumer spending could already have reached the level that the May scenario had suggested would be reached in the third quarter."
There is a section in the minutes though, where they also wonder how much of a signal to take from recent data suggesting that some of the upside news in Q2 could reflect “a bringing forward of the rise in spending previously projected to occur in Q3."
Members of the committee also note the significant weakening in the labour market and argued that some indicators suggested greater risks around the potential for longer lasting damage to the economy from the pandemic. “Current indications from business surveys suggested that furloughed employees might not be fully re-absorbed into the workforce as current government support measures started to be withdrawn later in the year." The minutes generally note that the latest surveys suggest upside risks to the path of unemployment.
Pace of purchases may not stay at a slower pace: If conditions worsen again, the Bank’s market notice makes it clear that they stand ready to step up the pace of purchases again.
The views expressed are the author’s own and do not constitute investment advice.