At the MPC meeting this month, Bank Rate was maintained at 0.1%. It was agreed the Bank of England should continue with the existing program of UK government bond purchases, financed by the issuance of central bank reserves.
No more talk of QE, the target for the stock of purchases is currently set at £875 billion. The Chancellor's £1 trillion pound bank note is in reach. Monetary financing of the fiscal deficit, is set to continue.
The Bank upgraded the expected out turn for 2020 slightly with an estimated drop in GDP of 10% from a previous 11%. Forecasts for the current year were downgraded, as a result of the lock down in the first quarter. The Bank now expects a progressive recovery from the second quarter onward. Growth in the year as a whole, is expected to be 5% this year and over 7% in 2022.
The unemployment rate is expected to peak at around 6.5% this year before falling to current levels by the end of the following year. Inflation is expected to move to the 2% target by the end of the year, pushing slightly above target range in 2022.
No surprises in the forecasts. No surprises either in the decision on monetary policy. Ten year gilt rates moved higher. Sterling moved closer to our mid term target of $1.40. Markets were slightly confused by the messaging on negative rates. The economy is set to recover rapidly, inflation is set to rise. The next move for interest rates, is more likely to be up but not for some time yet.
This appeared to be strange time, to instruct the banking sector, "to commence preparations in order to be ready to implement a negative bank rate at any point after six months." The MPC stressed the requests should not be interpreted as a signal the setting of negative rates was imminent or indeed in prospect at any time.
Enquiries by the PRA had revealed the Banking sector was ill prepared for the implementation of negative rates. High street lenders were not in a position to handle negative rates. Computer systems were not designed to accommodate reverse rate lending. It would take six months to implement the changes required.
The Governor's chisel in the tool box was a spanner in the works, without a transition period. Lenders should make the move now, to ensure, they will have the infrastructure to implement the changes, if and when required.
It was a well argued decision. The request could be misconstrued, as a signal the setting of a negative bank rate was in prospect or even imminent. This was a signal the Committee did not wish to send. It was not warranted by the "current conjuncture" and the "economic outlook", the minutes of the meeting explained.
Six months to make the changes. In six months it will become apparent the downward move will be irrelevant. "Let's do it anyway" appeared to be the decision. Overall it was concluded" it would be appropriate to start the preparations to provide the capability to do so if necessary in the future", even though at the moment it would appear, it would not be necessary at all.
This week, it was revealed a large cannabis plant was discovered near the Bank of England. The discovery followed a tip off about "a strong smell of cannabis" wafting over Threadneedle Street ... just saying ...
The Saturday Economist
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