Monex: Bank of England leaves policy unchanged

Monex: Bank of England leaves policy unchanged

Monetair beleid

This is a commentary by Simon Harvey, FX Market Analyst at Monex Europe, on the Bank of England's decision concerning the interest rate.

While developments have been positive since the February meeting, the Bank of England (BoE) decided to marginally push back against market expectations of an earlier normalisation by maintaining the current pace of quantitative easing (£4.4bn weekly) and requiring visible progress in inflation data towards the target. While the latter isn’t a new development from the BoE, the need to focus on how data comes in now as opposed to forecasted data was thrust into the limelight by the Fed and Chair Powell last night. The connotations of such a stance suggests the BoE may join the Fed in sitting behind the curve during the initial part of the recovery, which would be a dovish development, although it is too soon to draw such inferences. Sterling exhibited the slight unwind of hawkish expectations after the headlines came in, however, as it fell 0.17% against the dollar to touch fresh daily lows.

Going forward, the markets’ understanding of how policymakers view the economic recovery with regards to potential supply constraints and reaction by consumers to the easing of lockdown measures will be key. This places even more emphasis on inter-meeting communications by the Bank of England. May’s Monetary Policy Report will not only internalise the positive developments since January's forecasts but also the expected reaction of output and consumption to the easing of restrictions. MPC members' views may be guided by partial data releases after the April 12th easing should the government be able to stick to the loose timeline, but as the recovery progresses the pressure on the MPC to take a more active stance will build. At a minimum, markets will expect further guidance on the QE programme, which at present is expected to naturally taper towards year-end.