The Bank of England at its meeting on Thursday is expected to keep its policy matrix unchanged as it downgrades its economic outlook and publishes its view on the use of negative interest rates.
We expect the central bank to keep its policy rate at 0.1% and the total asset purchase program at £895 billion ($1.2 trillion) for the year.
We expect the central bank to keep its policy rate at 0.1% and the total asset purchase program — an important tool to stimulate the economy and ensure that yields remain low — at £895 billion ($1.2 trillion) for the year.
The central bank will almost certainly downgrade its near-term outlook to reflect a sharp drop in first-quarter output because of the pandemic and the associated pullback by the public and government-mandated lockdowns.
Although the economy will decline into recession in the current quarter, the monetary authority will project a rapid rebound in economic activity in 2021 and 2022.
Perhaps just as important, the Bank of England will publish the results of its analysis on the use of negative nominal rates and the efficacy of such unorthodox policy to stimulate the economy out of what is the worst crisis since 1945. In some respects, the Bank of England will not rule out the use of such policies but not fully embrace them either.
The Bank of England faces a challenging policy environment. The ruling out of such a move could trigger market participants to bid up yields, inhibiting the intensity of the eventual recovery. Yet if the embrace of negative nominal rates is too close, that too could create expectations of thinner margins at commercial banks, reduced lending, falling risk appetite and the specter of economic stagnation.
Moreover, academic research on the efficacy of using negative nominal interest rates to bolster growth is highly uneven. The use of the nuclear option, based on our evaluation, is not appropriate for this economy at this time.
Our evaluation of the Monetary Policy Committee implies that the nine internal members who make up the committee are strongly against using negative nominal rates, while the four external members will not rule them out.
In our estimation, cheap borrowing is conducive to a more robust recovery. But it is a necessary, though not sufficient, condition to return the domestic economy back toward full production and employment.
The peculiar conditions that exist inside pandemic economics require a bold and persistent use of fiscal policy. Monetary policy under such conditions is a complement and not a substitute for robust and sustained fiscal action. Now is not the time for either fiscal or monetary fatigue.
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