EUROPE ECONOMICS: Mitsubishi UFG Reviews The Bank of England Policy Meeting
06:49 AM EST, 02/05/2021 (MT Newswires) -- MUFG noted that the Bank of England (BoE) on Thursday was more optimistic on the United Kingdom gross domestic product (GDP), with the economy's rebound in Q2 onwards proving enough to keep the projection as before -- the economy recouping COVID-19 losses by Q1 2022.
Furthermore, the BoE which before had highlighted downside risks to its growth projections shifted to a symmetric risk bias, wrote the bank in a note. Perhaps the biggest focus for the financial markets was on the conclusions in relation to the use of negative rates going forward.
The consultation document's conclusion was what MUFG had expected; that was that banks should indeed prepare for the scenario of using negative rates as a policy tool but that there was also a clear message that the BoE's Monetary Policy Committee (MPC) "did not wish to send any signal that it intended to set a negative Bank rate at some point in the future".
The guidance to banks was that it would be a policy option only from August onwards, said MUFG. That was a key point here given the current strong consensus was that the UK by that point will be past any need for additional monetary easing.
In essence, assuming the current rate of vaccinations in the UK continued with nothing to undermine efficacy rates, then the worst point of economic weakness had already passed and as a consequence, the window for monetary easing had probably closed.
In addition, the minutes of the MPC meeting also revealed that the MPC had requested a review of the previous guidance in regard to the tapering of quantitative easing (QE), added the bank. The guidance given prior was that the size of assets held wouldn't be reduced until the Bank rate had reached a level at which it could be cut, and that level was deemed to be 1.50%.
The minutes stress this request shouldn't be interpreted as a signal on future policy actions but it will of course be interpreted as opening up the potential of a sooner than expected tapering of QE.
All in all, the MPC Thursday meeting was more hawkish than expected and certainly reinforced MUFG's view of potential GBP outperformance. Given the bank didn't see the EUR/USD move or the U.S. dollar (USD) strength move extending much further, MUFG saw greater scope in GBP/USD moving higher from here than EUR/GBP moving further lower.
MUFG saw further scope for rates to move higher as negative rate risk was removed from the financial markets and as such GBP support should be sustained for a period yet.