Central Banks

Bank of England expected to hold rates steady, but assessment of lockdown 'scars' in focus

Key Points
  • Since the beginning of the pandemic, the BOE has cut rates twice from 0.75% to 0.1% and announced £200 billion ($247.55 billion) of new quantitative easing, bringing its bond buying program to a total of £645 billion.
  • As well as the rate decision, Thursday will also see the British government announce the outcome of its second review of lockdown measures, after the U.K. surpassed Italy to record the highest fatality rate in Europe.
A woman wearing a protective face mask crosses the road in front of the Bank of England in what would normally be the morning rush hour in the City of London on March 17th, 2020. The financial district of the UK is unusually quiet after the government requested people to refrain from all but essential travel and activities yesterday.
Jonathan Perugia

The Bank of England is expected to leave rates unchanged on Thursday, with analysts expecting the Monetary Policy Committee (MPC) to wait until June before acting in order to assess the impact of coronavirus containment measures.

Since the beginning of the pandemic, the central bank has cut rates twice from 0.75% to 0.1% and announced £200 billion ($247.55 billion) of new quantitative easing, bringing its bond buying program to a total of £645 billion.

It has also provided direct funding for companies impacted by the pandemic and supplied liquidity for the financial system, along with easing conditions for lenders.

However, despite PMI (purchasing managers' index) readings at record lows and the U.K. expecting its deepest economic downturn in living memory, analysts expect the MPC to withstand pressure to beef up its stimulus program this time around.

As well as the rate decision, Thursday will also see the British government announce the outcome of its second review of lockdown measures, after the U.K. surpassed Italy to record the highest fatality rate in Europe.

As of Wednesday morning, more than 196,000 cases had been confirmed in the country, with more than 29,000 deaths.

Assessing the 'enduring scars'

Goldman Sachs projected a quarterly GDP (gross domestic product) contraction of 11.5% in the second quarter for the U.K., with a contraction of 8.5% across 2020 as a whole. It sees economic growth recovering to slightly surpass its pre-crisis peak by the end of 2021.

In a note Tuesday, Goldman analysts predicted that the central bank will take a similar view on the trajectory, waiting until June to assess the stringency of containment measures in place at the time.

"We see an outside chance of additional QE being announced as early as this week, but in our base case we expect Governor Bailey to instead underscore that the MPC is willing and able to expand any of its asset purchase facilities at any time," Goldman Sachs European Economist Adrian Paul wrote.

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Paul suggested that the MPC's assessment of the enduring effects of the pandemic would likely be the most interesting for market participants.

"The deeper the scars left by the current lockdown, the more severe the damage done to the productive capacity of the UK economy, and the greater the likelihood that the Committee will eventually lower its estimate of potential output growth," he said.

Push back on V-shape recovery

The Bank of England's new forecasts could mirror the blueprint of the European Central Bank (ECB), which last week laid out three scenarios based on different speeds of reopening and recovery.

This would mean the central bank could avoid making formal assumptions about the government's process for reopening the economy, according to ING Developed Markets Economist James Smith.

ING has forecast around a 10-15% peak-to-trough fall in economic output on a quarterly basis, and Smith said the Dutch bank's analysts would not be surprised to see the BOE pencil in an even sharper downturn on Thursday.

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"In the end, the precise size of the fall is a little academic now - more relevant is the speed and shape of the recovery," Smith said in a note Monday.

"We expect this process to be fairly gradual, not least because some firms will not emerge from the crisis in the same shape, despite the government's best efforts. That, in turn, means unemployment could stay reasonably elevated for a prolonged period of time."

Smith added that all of this considered, the Bank of England may push back on the idea of a "V-shaped" recovery on Thursday.