BOE maintains policy stance but boosts growth outlook

      The Bank of England (BOE) maintained its easy monetary policy stance by holding steady its key interest rate and target for bond purchases and while it raised its forecast for economic growth sharply, it underscored this outlook remains uncertain and hinges on the evolution of the COVID-19 pandemic.
     As in previous months, BOE said it "does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably."
      The bank's monetary policy committee (MPC) once again kept its bank rate at a rock-bottom 0.1 percent, unchanged since it was cut in March 2020 at the height of the pandemic.

      The MPC also voted to maintain its stock of corporate bond purchases of 20 billion pounds and to continue buying UK government bonds with a target of 875 billion.

      BOE originally began purchasing assets to keep down long-term interest rates in March 2009, in the depth of the global financial crises, and since then the total target has ballooned from 200 billion.

      The last boost to asset purchases came in November 2020 when the UK entered a second lockdown to control the pandemic and the target was raised by 150 billion pounds, the third increase in 2020.

      In a separate market note, BOE said the pace of the purchases under the existing 150 billion pound program, which began in January and will be completed by the end of this year, could now be slowed, but pointed out his operational decision should not be interpreted as a change in the stance of monetary policy.

     "The outlook for the economy, and particularly the relative movement in demand and supply, remains uncertain," BOE said, adding it continues to depend on how the pandemic evolves and measures taken to protect public health, and how households, businesses and financial markets respond to developments.

     But as seen in other countries, recent measures to contain the pandemic have had less of a dramatic impact on economic activity as in the early phase of the pandemic, and BOE said an estimated fall of around 1.5 percent in the country's gross domestic product in the first quarter was not as a bad as it had assumed in February.

     The United Kingdom has seen a sharp fall in COVID cases and vaccinations have proceeded, leading to a lifting on restrictions on economic activity.

     BOE said it expects growth in the second quarter to rise sharply though still be some 5 percent below the level seen in fourth quarter of 2019.

     "GDP is expected to recover strongly to pre-Covid levels over the remained of this year in the absence of most restrictions on domestic economic activity," BOE said, adding demand would be boosted as health risks and uncertainty falls, fiscal and monetary stimulus and by households running down around 10 percent of their additional accumulated savings over the next three years.

     "After 2021, the pace of GDP growth is expected to slow as the boost from some of those factors wanes," it added.

     The UK economy is now forecast to expand 7.25 percent in 2021, up from the February forecast of 5.0 percent and a 9.75 percent contraction in 2020, with inflation rising to 2.5 percent from 0.5 percent last year and an earlier forecast of 2.0 percent

      The pace of growth will ease to 5.75 percent in 2022, down from an earlier forecast of 7.25 percent, and then to 1.25 percent by 2023. Inflation in those two years will return to the bank's 2.0 percent target.

      The Bank of England issued the following press release:

"The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 5 May 2021, the Committee judged that the existing stance of monetary policy remained appropriate. The MPC voted unanimously to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion. The Committee voted by a majority of 8-1 for the Bank of England to continue with its existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.

Covid-19 (Covid) and the actions taken to contain it have continued to have a dramatic and rapidly changing impact on the United Kingdom and countries around the world. The Committee’s updated projections for economic activity and inflation are set out in the accompanying May Monetary Policy Report. 

Global GDP growth is likely to have slowed in 2021 Q1 as Covid-related restrictions weighed on economic activity, although growth appears to have been stronger than expected in the February Report. Covid vaccination programmes have progressed and picked up pace in many countries. Recently, however, new Covid cases have increased significantly in India and some other economies, leading to tighter restrictions. Advanced-economy risky asset prices have continued to increase and longer-term government bond yields have stabilised since March, such that they are higher than at the time of the February Report.

UK GDP is expected to have fallen by around 1½% in 2021 Q1, less weak than was assumed in the February Report. New Covid cases in the United Kingdom have continued to fall, the vaccination programme is proceeding apace, and restrictions on economic activity are easing. Reflecting these developments, GDP is expected to rise sharply in 2021 Q2, although activity in that quarter is likely to remain on average around 5% below its level in 2019 Q4. GDP is expected to recover strongly to pre-Covid levels over the remainder of this year in the absence of most restrictions on domestic economic activity. Demand growth is further boosted by a decline in health risks and a fall in uncertainty, as well as announced fiscal and monetary stimulus. Consumer spending is also supported by households running down over the next three years around 10% of their additional accumulated savings. After 2021, the pace of GDP growth is expected to slow as the boost from some of those factors wanes. The level of activity is higher in each quarter of the forecast than in the February projections. 
  
The fall in activity over the past year has reflected a decline in both demand and supply. The LFS unemployment rate fell slightly to 4.9% in the three months to February, but it is likely that labour market slack has remained higher than implied by this measure. Overall, there is judged to be spare capacity in the economy at present. The extension of the Government’s employment support schemes in Budget 2021 is expected to limit significantly the near-term rise in the LFS unemployment rate. The MPC also expects the medium-term equilibrium rate of unemployment to rise by less than was forecast in February. Spare capacity is eliminated as activity picks up during 2021, and there is a temporary period of excess demand, before demand and supply return broadly to balance. 

Twelve-month CPI inflation rose from 0.4% in February to 0.7% in March, with the February outturn triggering the exchange of open letters between the Governor and the Chancellor published alongside this monetary policy announcement. The weakness of recent CPI outturns has largely reflected the direct and indirect effects of Covid on the economy. As has been the case in recent MPC forecasts, inflation is projected to rise to close to the target in the near term as some of those effects fade.  In the central projection, CPI inflation rises temporarily above the 2% target towards the end of 2021, owing mainly to developments in energy prices. These transitory developments should have few direct implications for inflation over the medium term, however. In the central projection, conditioned on the market path for interest rates, inflation returns to around 2% in the medium term.  

The outlook for the economy, and particularly the relative movement in demand and supply, remains uncertain. It continues to depend on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments.

In the central projections of the MPC’s May Report, the economy experiences a temporary period of strong GDP growth and a temporary period of modestly above-target CPI inflation, after which growth and inflation fall back, with inflation around the target two and three years ahead.  In judging the appropriate stance of monetary policy, the Committee will, consistent with its policy guidance and as always, focus on the medium-term prospects for inflation, including the balance between demand and supply, rather than factors that are likely to be transient.

The MPC will continue to monitor the situation closely and will take whatever action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.

At this meeting, the Committee judged that the existing stance of monetary policy remained appropriate."

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