MUFG: Bank of England meeting brings no surprises, but medium-term incertainty

MUFG: Bank of England meeting brings no surprises, but medium-term incertainty

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This is a commentary by Henry Cook, Economist at MUFG, on the most recent decisions of the Bank of England.

The BoE left interest rates and its target asset purchase stock unchanged at the March MPC meeting. The unanimous 9-0 votes for both were no surprise. The newsflow since the last meeting has been mostly positive: economic activity in January was not as bad as had been feared, the UK Budget reduced near term risks as emergency coronavirus response measures (such as the furlough scheme) were further extended, and there are likely to be positive global spillovers from the enormous fiscal stimulus in the US too.

But despite these reasons for optimism, the main message to take away from the minutes is the high degree of uncertainty over the medium term. While a post-lockdown rebound in activity is a given, the path to full recovery is unclear. The MPC had a “range of views” on the balance of supply and demand during the recovery. The chief economist’s optimism is not shared by all MPC members with some likely to share our view that some degree of economic scarring is inevitable after such a plunge in output.

On the downside risks, yesterday’s news about vaccine supply difficulties in April served as a reminder that the UK’s initial success with its vaccination programme cannot be taken for granted.  There are also risks around the UK’s new trading relationship with the EU. The minutes mentioned the dire figures on exports to the EU for January. Stockpiling and pandemic distortions mean that it’s too early to read too much into these for now, but we wonder if Brexit-induced trade friction could become a worry if short-term disruption were to turn into a longer-term trend

The general tone was perhaps slightly more dovish than anticipated. If downside risks do materialise, the MPC is ready to “take whatever additional action is necessary” to reach its remit (however, in stark contrast to the February meeting, there was no discussion of negative rates in the minutes for this meeting). In terms of the bar for normalisation, temporary factors may push inflation higher in the second half of the year but the MPC will wait for “clear evidence” that the 2% inflation target can be met sustainably before considering tighter monetary policy.