Rates Spark: BOE Takes Centre Stage

As we expected, there were no new measures from the BOE today but a decision to add QE will likely have to be taken by July. GBP money market functioning has improved. It has also improved dramatically in the US. There are bills to pay though, as we saw from the $3bn Q2 financing ambition for the US. We see curve steepening from both ends.

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BOE: no pressure to act, for now

The MPC met in a relatively benign market environment and decided not to change policy today. We would not blame its members for feeling satisfied with the way things have turned out in financial markets since they unveiled an unprecedented array of easing measures. This is all the more noticeable that, since the last meeting, the UK has overtaken other European countries as the most affected by the pandemic, and growth expectations have generally been cut dramatically.

So no pressure to add stimulus then? Well, not in the near term at least. As our UK economist pointed out, the committee used its forecasts to signal only a gradual recovery after the Q2 slump, and it resorted to scenario analysis to avoid taking a view on the length of lockdown measures. The prevalence of downside risks should make a strong case for keeping their finger close to the ‘ease’ button.

The BOE has bought almost all Gilts issued this year

Gilt and CP purchases at full speed

At the current pace, we estimate the BOE will spend the total £200bn envelope announced in March by early July. The speed at which purchases are carried out has allowed it to absorb the equivalent of all the Gilts that were issued since January. The question of an extension will arise quite quickly however. The BOE has the choice between tapering purchases to avoid a cliff effect in July, or to boost purchases. Given the additional borrowing planned by the DMO, we’re leaning towards the latter. This is also what the two MPC members voting for boosting QE by £100bn suggests. We're expecting this view to gain traction.

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