Hawkish: Although the BoE saw no reason to adjust its ultra-easy policy stance at the May Monetary Policy Committee (MPC) meeting, policymakers sent a trio of hawkish signals to market:  

1) The BoE announced that it will begin to taper asset purchases from 10 May– that the taper comes immediately following the announcement is a bit of a surprise, we had expected the BoE to today announce that tapering would begin at the start of H2 ;

2) the BoE has sharply upgraded its forecasts for growth, employment and, importantly, inflation – it now expects a modest but temporary overshoot of the 2% target this year; and

3) outgoing BoE chief economist Andy Haldane voted to reduce the size of the current envelope of Gilt purchases to £100bn from £150bn.  

Although it is not new information that the BoE plans to end its asset purchases in December 2021, the news that the BoE will start to scale back its monthly asset purchases already - on top of the decidedly hawkish tilt in the minutes relative to previous meetings - will probably force many of the remaining market participants who had expected the BoE to extend quantitative easing into 2022 to unwind their positions. Taken together, these factors may add to near-term upward pressure on gilt yields and sterling.  

The BoE’s rationale for still pursuing an ultra-easy policy and sticking to its guidance for a gradual exit (if) and when the time comes hinges on the bank’s call that strong medium-term growth and an inflation overshoot will not last. If economic performance and price pressures surprise to the upside on a sustained basis, the BoE could be forced into reversing course earlier and more strongly than its current guidance might suggest.

On hold for now

At the May meeting, policymakers voted unanimously in favour of keeping the bank rate at 0.1% and to maintain the stock of corporate bonds at £20bn. However, the committee voted 8-1 in favour of continuing ongoing UK government bond purchases until the target of £875bn is reached (likely by year end). Outgoing chief economist Andy Haldane, who recently warned of rising inflation risks, backed a reduction in the target for the stock of Gilt purchases from £875bn to £825bn – that would have brought additional purchases to an end in August rather than at around the end of 2021.

Reflecting ‘balanced’ risks to the medium-term outlook for GDP and inflation, the BoE struck a somewhat less dovish tone than in recent meetings:

‘The Committee had previously said that risk management considerations had implied that policy should lean strongly against downside risks to the outlook, to support the economy and to help to ensure that weakness in the economy was not amplified by a tightening in monetary conditions that could slow the return of inflation to the target. Although those downside risks were judged to have fallen somewhat recently, the same considerations still applied.'

Reflecting the more symmetric risks to the outlook, the BoE has adjusted forward guidance (strikethrough shows March guidance, bold highlights new guidance).

‘If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit. The MPC would continue to monitor the situation closely and would take whatever action was necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.’

Significant near-term upgrades

The BoE now estimates that real GDP contracted by 1.5% qoq in Q1 (from -4.0% in February and close to our own call of -1.7%). For 2021, the BoE has revised up its GDP growth forecast to 7.25% from 5.0% while cutting 2022 to 5.75% from 7.25% - see table below. 2023 remains unchanged at 1.25%.

With lower unemployment projected across the horizon (unemployment at 5% in 2021 and 4.5% in 2022 versus 6.5% and 5.0% in February, respectively, and stronger domestic demand growth, the BoE has upgraded its calls for inflation. The BoE now expects headline inflation to hit 2.5% this year from 2% previously, before slowing to 2% in 2022 (2.25% previously) and 2023 (unchanged).

The BoE will begin to taper asset purchases

In the minutes the BoE notes that ‘The existing programme of £150 billion of UK government bond purchases had started in January and its completion was expected by around the end of 2021. As envisaged since the announcement of the programme in November 2020 and consistent with developments in financial markets since then, the pace of these continuing purchases could now be slowed somewhat.’

The minutes emphasise that ‘This operational decision should not be interpreted as a change in the stance of monetary policy. As measured by the target stock of purchased assets, that stance remained unchanged.'

In a market notice accompanying the minutes the BoE announced that purchases would slow from £4.4bn per week to £3.4bn per week from 10 May to 4 August when the policy could be re-assessed.

Policy outlook

After completing asset purchases by the end of the year, we expect the BoE to keep rates on hold in 2022 while outlining its strategy for tighter monetary policy further out – including the level to which the bank rate would need to rise before the BoE would begin to unwind its balance sheet.

We expect the first rate hike from its current historic low of 0.1% to come in 2023. However, with its vastly expanded toolkit – including credit policies and macroprudential tools – the first steps towards a less aggressive monetary and financial policy may come in 2022. Upside risk to growth and inflation skew the chances for the first rate hike towards late-2022.  

Kallum Pickering
Senior Economist, Director

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