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The Bank of England on Thursday announced it would boost quantitative easing by £150 billion, an amount significantly greater than the £100BN markets were anticipating, and economists are saying this won't be the last expansion.
The increase in its asset buying programme takes the total to £895 billion and will ensure quantitative easing extends into 2021.
"The pace of purchases could remain at around its current level initially, with flexibility to slow the pace of purchases later. Should market functioning worsen materially again, however, the Bank of England stood ready to increase the pace of purchases to ensure the effective transmission of monetary policy," said a statmeent from the Bank.
Interest rates were left unchanged at 0.10% and there was no mention of looming interest rate cuts, a development that appears to have aided Sterling exchange rates higher. "Sterling rallied as there was no surprise rate cut and no mention of plans to take rates negative," says Neil Wilson, Chief Market Analyst at Markets.com.
"Neither the minutes nor the Monetary Policy Report provide any update on the BoE’s assessment of the suitability of negative rates even though the bank has announced such policy option is under review. This could be a sign that the BoE is trying to reduce the growing speculation that such a move could be imminent," says Kallum Pickering, Senior Economist at Berenberg.
"Some observers seem to be basing their expectation for negative rates on the assumption that asset purchases may soon reach their limit and thus the BoE would need to reduce rates below zero if it wanted to add more stimulus. The worry is far overdone, in our view. There are probably close to £1trn in eligible ‘free float’ gilts that the BoE could still buy on the secondary markets – the government is adding rapidly to the stock via its massive issuance of debt to finance its pandemic policy," adds Pickering.
The decision to boost quantitative easing and leave interest rates unchanged came from an unanimous 9-0 votes on the Monetary Policy Committee.
"This extra QE is unlikely to be the last expansion," says Ruth Gregory, Senior UK Economist at Capital Economics. "We think the MPC will announce at least £100bn more QE in 2021, more than the consensus currently expects."
In a statement, the Bank said the MPC "announcing further asset purchases now should support the economy and help to ensure the unavoidable near-term slowdown in activity was not amplified by a tightening in monetary conditions that could slow the return of inflation to the target".
The decision comes on the day England moves back into a lockdown, which the government says will slow the spread of covid-19.
However, economists say the move will deliver a severe impact on UK economic growth and employment prospects, a view confirmed by the Bank's own economists:
The Bank's decision to boost quantitative easing therefore aims to mitigate some of the negative impact of the government's decision.
"There are signs that consumer spending has softened across a range of high-frequency indicators, while investment intentions have remained weak," said the Bank. "Developments related to Covid will weigh on near-term spending to a greater extent than projected in the August Report, leading to a decline in GDP in 2020 Q4."
The Bank issued new growth and inflation forecasts in their November Monetary Policy Report, showing CPI inflation is projected to be a bit above its 2% target by the end of 2021 and the "inflation risks were judged to be balanced".
Economist Samuel Tombs at Pantheon Macroeconomics says the Bank's projections appear to signal further stimulus measures are coming.
"The Committee, however, has signalled with its inflation forecasts that it sees a strong case for more stimulus. Its forecast for inflation in two years’ time—the relevant horizon for monetary policy decisions today—is 1.86% if Bank Rate is assumed to remain at 0.10%, but 1.95% (i.e. much closer to the 2% target) if Bank Rate follows the slightly declining path anticipated by markets. The probability of negative rates being imposed early next year, therefore, appears to have increased," says Tombs.
The Bank has taken into account the new lockdown plans but does assume the hit to the economy gradually fades and that there is an immediate move to a free trade agreement with the E.U. in January.
The risks to the outlook are therefore skewed to the downside according to Tombs.
"The outlook for the economy remains unusually uncertain. It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom. It also depends on the responses of households, businesses and financial markets to these developments," said the Bank.
There was no mention of negative interest rates in the minutes, "suggesting the MPC still remains some way from being persuaded of the case for such a policy. So this all suggests that the Bank thinks that it has done enough," says Gregory.