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BOE Sees Rapid U.K. Rebound With Johnson’s Vaccine Push

Feb 4, 2021

The Bank of England said the U.K. economy is heading for a rapid pickup in light of a bold vaccination effort, a sign that the stifling grip of the coronavirus crisis on growth may finally start to ease.Despite lowering its outlook for the year, the central bank sounded an optimistic note on its hopes of a powerful rebound. The Monetary Policy Committee also kept stimulus in place and agreed as a contingency that banks should prepare for the possibility of negative interest rates.

U.K. bond yields rose across the board, with the 10-year and 30-year rates climbing to the highest levels since March as investors focused on the central bank’s optimism over the vaccine rollout and message that negative rates won’t come imminently. The pound hit its strongest level against the euro since May.

Best Herd Immunity Trajectory in Europe

“GDP is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination program is assumed to lead to an easing of Covid-related restrictions and people’s health concerns,” the BOE said.

The outlook suggests Prime Minister Boris Johnson’s aggressive immunization push is already bolstering the U.K. Economy. Coronavirus lockdowns still in force have disrupted many activities at the same time that the new trade arrangements kicked in following Britain’s exit from the European Union.

The government yesterday said 10 million citizens have been vaccinated, leaving the nation on track to protect the highest risk groups by Feb. 15. Bloomberg’s Vaccine Tracker shows 15% of the population have received at least one dose, compared to 2.4% in Germany.

“Programs have begun in a number of countries, including the U.K., which has improved the economic outlook,” Governor Andrew Bailey told reporters in an online press conference. “The MPC’s central forecast assumes that Covid-related restrictions and people’s health concerns weigh on activity in the near term, but that the vaccination program leads to those easing.”

U.K. economic activity is about 60% below pre-crisis levels according to Bloomberg Economic gauges that integrate data such as mobility, energy consumption and public transport usage. That makes it the worst advanced economy tracked by BE.

British Malaise

BOE policy makers kept their bond purchase target at 895 billion pounds ($1.2 trillion), about 150 billion pounds of which will be acquired during the current year. The interest rate was held at 0.1%, a record low.

Money markets trimmed bets on a rate cut, pricing 4 basis points of easing by December compared to 8 basis points before the decision.

“It was mainly a reaction to the clarification of the BOE that it is preparing for negative rates, but does not plan to introduce them for now,” said Thu Lan Nguyen, FX strategist at Commerzbank AG.

Economic Rebound

In its report, the BOE said that on balance, banks should prepare for the possibility of the negative policy tool being activated, though not for at least six months.

While the U.K. central bank has until now avoided bringing rates below zero, its toying with that idea in the past year sometimes left the institution representing the last hope for the future of subzero monetary policy.

What Bloomberg Economics Says:

“The Bank of England used its February forecasts and policy decision to deliver an upbeat take on the economic outlook and kick the prospect of negative rates into the long grass. Both are signals that any further easing is unlikely, unless the outlook deteriorates.”

–Dan Hanson, senior U.K. economist. Click here for the full REACT.

Only four counterparts — in the euro zone, Switzerland Denmark and Japan — still use the measure, and none of them cut lower in 2020 despite the severity of the coronavirus-induced downturn.

“My message to markets is you really should not try to read the future behavior of the MPC from the actions we’re taking on our toolbox,” Bailey told reporters.

In a sign of how the crisis has rewritten the BOE’s rule book, officials also asked staff to start work on reconsidering its exit strategy from the current emergency policy settings, while noting that isn’t a signal that step is imminent.

Previously, the BOE had said the stock of purchased assets, which have more than doubled since the start of 2020, would be expected to be maintained until the bank’s rate reached a level from which it could be cut materially, but Bailey has previously signaled he favored a different approach, with the balance sheet is reduced first.

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