MUFG: Very subtle mini-taper from the British central bank

MUFG: Very subtle mini-taper from the British central bank

Central bank UK
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'The Bank of England is feeling increasingly confident about the outlook for the UK economy over coming quarters and now feels ready to slow the pace of its QE purchases.' That states Henry Cook's, economist at MUFG Bank in a commentary on the Bank of England's decision at Thursday.

‘Tightropes’ and ‘tantrums’ are often associated with the word ‘taper’ when it comes to monetary policy, but this move is certainly not a surprise. The BoE had previously indicated that a slower pace was on the cards to prevent the £ 875bn gilt target being reached ahead of the end-2021 target so the question was one of timing.

One option would have been for the BoE to stand pat for now and implement a more aggressive taper at the June meeting, but instead it has gone for a smoother, more gradual approach. When it comes to pandemic policy changes, the change of pace – from 4.4bn to 3.4bn each week - is very subtle.

On its projections, a big upward revision to the 2021 GDP forecast, from 5% to 7.25%, stands out. There is also a significant reduction in the expected peak for unemployment – from 7.8% to 5.4%.

The Bank is increasingly confident that household savings accumulated during lockdowns will boost the recovery and help the economy to reach its pre-pandemic level by the end of the year. However, after this mechanic post-lockdown rebound the BoE does seem to expect some lasting damage from the pandemic with the level of activity remaining below that implied by its January 2020 forecasts.

Indeed, after such a severe shock it will be hard to conclude that monetary support is no longer required and the BoE is likely to be cautious when it comes to taking its foot off the accelerator. It was very clear in the announcement that the MPC will look past any transitory increase in inflation as restrictions are lifted, and instead look for signs that the 2% is being reached sustainably.

So, while the BoE has implemented a ‘mini-taper’ it is not a signal that monetary policy will be tightened further in the immediate future.