The monetary policy committee (MPC) of the Bank of England (BoE, the central bank) voted 8-1 to expand its quantitative easing (QE) programme of asset purchases by £100bn (US$126bn), raising the total stock to £745bn, equivalent to about 40% of GDP. The MPC voted unanimously to leave the UK’s key policy interest rate unchanged at 0.1%.
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An expansion of the BoE’s asset-purchase programme had been predicted by financial markets, with the planned increase of £100bn towards the lower range of expectations. The decision was guided as much by ongoing efforts to contain borrowing costs in financial markets (amid a rapidly increasing government deficit) as by the BoE’s 2% inflation target.
The BoE had relaunched QE in mid-March in response to the coronavirus (Covid‑19) crisis, when it unveiled a £200bn bond-buying programme (primarily of government debt, with around 5% covering investment-grade corporate bonds). Over the past three months the BoE has bought about £150bn of government debt (gilts), at a rate of £14bn per week. This almost exactly matches the increase in newly issued gilts by the Treasury. With the BoE a willing buyer of almost all new government debt, borrowing costs for benchmark ten-year gilts have remained at historically low levels. Without the BoE’s involvement, private-sector gilt buyers would probably have demanded higher returns, pushing up borrowing costs. At the current rate of purchases, the £200bn QE programme would have ended in early July. The £100bn expansion will see the BoE remain an active participant in the bond market over the coming months.
The BoE indicated that the slump in second-quarter UK GDP was likely to be less severe than its May forecast, but that it was “difficult to make a clear inference from that about the recovery”. It highlighted the material weakening of the labour market and the risk of a persistently higher level of unemployment and ongoing precautionary behaviour by firms and consumers. Amid recent growing speculation in financial markets, there was no mention by the BoE of negative interest rates. Such a move is unlikely in the near term, but the BoE is reviewing its policy toolkit, and it is a possibility from 2021‑22 if economic activity continues to disappoint.
We expect that the BoE will keep interest rates at 0.1% until at least 2021, and continue to expand its bond-buying programme as needed to ensure the government can borrow at favourable rates.
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