BoE is seen increasing further the size of QE – UOB

Lee Sue Ann, Economist at UOB Group, assesses the latest BoE event and the prospects of extra easing in the next months.

Key Quotes

“As expected, the Bank of England (BOE) announced, at its June meeting, a boost to its quantitiave easing (QE) programme by GBP100bn. The additional bond purchases will take the total value of the Asset Purchase Facility (APF) to GBP745bn.”

“Meanwhile, all nine MPC members agreed to keep its key benchmark interest rate at the historic low of 0.10%. There is increasing speculation that the BOE might cut interest rates to below zero for the first time as policymakers appear to have become less resistant to this option. However, there was nothing in the accompanying minutes that gave any clues about the MPC’s latest thinking. Whilst tempting, it remains unclear as to how negative rates would aid the recovery, given the negative impact on bank profitability. The decision to introduce negative interest rates will not be taken lightly, although we do not rule out this option should the economic outlook deteriorate further.”

“In all, although the decision to increase the asset purchase target by GBP100bn was within our expectations, the slower pace of purchases came as a surprise. We were expecting the current rate of bond buying to be maintained until August, at which point the MPC would top up its QE program again. Nonetheless, we think the latest move by the BOE is unlikely to mark the end of its efforts to counter the economic slump, and we forecast a further extension of GBP100bn by the November meeting. A further option is for the BOE to make changes to the Term Funding Scheme (TFS). This could give lenders access to funding below the Bank rate, assuming they increase lending to businesses (specifically SMEs).”