BoE to play for time as darker clouds loom over UK economy

The Bank of England is expected to set the stage for further stimulus measures to boost the UK economy on Thursday, amid rising tensions over Brexit and rising coronavirus infections.

But economists predict the Bank’s monetary policy committee won’t take any action now as they wait to see if earlier more gloomy predictions for the latter half of the year materialise.

Since the MPC last met in August, the summer’s recovery in economic activity has proved slightly stronger than the BoE’s forecasts suggested, inflation has been higher than the central bank projected and unemployment has so far risen less than feared.

Against that backdrop, the consensus view among analysts is that the MPC will leave interest rates on hold at 0.1 per cent and make no changes to the pace or size of its asset purchase programme, which is currently set to run until the end of the year.

“We expect the MPC to play for time this month and avoid closing off any of its options,” said Samuel Tombs, at the consultancy Pantheon Macroeconomics, arguing that policymakers would be unwilling to tie their hands until they have more information over the state of the recovery.

By November, however, when the MPC next meets, the Bank will know more about the likely outcome of post-Brexit trade talks and the scale of job losses as the UK’s furlough scheme ends. Policymakers may also have a clearer view of the outlook for fiscal policy, with chancellor Rishi Sunak already warning that taxes will need to rise to put the public finances back on a sustainable path.

Splits of opinion on the MPC are nevertheless already apparent. The BoE’s chief economist Andy Haldane believes people are too pessimistic about the potential for a rapid rebound from recession, telling the newspaper City AM this month that “the popular narrative is on the gloomy side of neutral”.

Other MPC members, meanwhile, have hinted that they might already be inclined to vote for further monetary stimulus. Michael Saunders, an external member of the committee, said this month he thought it “quite likely that additional monetary easing will be needed”. Gertjan Vlieghe, another external member, and Dave Ramsden, the BoE’s deputy governor for markets and banking, have both underlined the risks of a persistent rise in unemployment holding back the recovery.

“It wouldn’t take much in the way of adverse risks crystallising for the dissenters to form a majority before 2020 is out,” said Martin Beck, at the consultancy Oxford Economics.

Andrew Bailey, the BoE governor, has made it clear that the Bank will want to see “more than normal evidence and assurance that the economy is on track” before withdrawing stimulus. He has also signalled that if more stimulus is needed, policymakers are likely to expand asset purchases before resorting to the more radical option of negative interest rates.

Many economists believe that by November, the economic outlook will have darkened enough for policymakers to vote for an expansion of quantitative easing.

The BoE’s current central projection is for GDP to return to pre-pandemic levels by the end of 2021 — a more optimistic view than that taken by other forecasters. But this is premised on the UK avoiding a second national lockdown, and on a smooth transition to a trade deal with the EU.

The BoE has also signalled unusually big downside risks to this forecast — partly to reflect the threat of widespread local Covid-19 lockdowns, and of a disruptive breakdown in post-Brexit trade talks with Brussels.

The most recent round of talks failed to make any significant progress and relations between the UK and EU have been further soured by Boris Johnson’s introduction of new legislation which overrides key elements of his Brexit divorce treaty with Brussels.

Mr Bailey told MPs earlier this month that the MPC would focus in the run-up to its November meeting on “the key question . . . how much disruption, or not, might there be to trade, and therefore to the economy, at the turn of the year”.

“Even though the initial recovery has been better than expected, the downside risks of a resurgence of the virus, a no-deal Brexit and a tightening of fiscal policy are all starting to materialise,” said Andrew Wishart, at the consultancy Capital Economics.

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