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18 September 2020

Monetary Policy and Quantitative Easing Programme Updates

Bank of England Monetary Policy Committee & The Federal Reserve

James Rowbury, Investment Research Coordinator

The Bank of England (BoE) Monetary Policy Committee (MPC) came to the unanimous decision to leave the UK interest rate at its current record low of 0.1%. This decision also resulted in the BoE leaving its quantitative easing (QE) programme at £745bn, which had been previously increased in March. The MPC has no intention of implementing a contractionary monetary policy until there are clear signs that material developments have been made in reducing the country’s spare capacity (lowering unemployment) and achieving the 2% inflation target comfortably. Along with the BoE stating that the outlook seems “unusually uncertain”, QE has been maintained to keep long-term interest rates low to the benefit of mortgage payments and government debt.

Many analysts have suggested that they expect the MPC to raise QE stimulus by another £100bn at the next meeting in November, with the increasing number of Coronavirus cases and localised lockdowns slowing economic recovery. Inflation was expected to remain at lower levels while the number of employees working in offices is far below normal levels; ideally, as they slowly return to the office, local economic activity would increase, but local lockdowns are hindering this. The MPC seems to have a bullish outlook on the recovery from Coronavirus moving into the late end of 2020. It has forecast an 18% increase in GDP in the third quarter, as it expects the impact of Brexit and Coronavirus to soften towards the year end. City analysts have mentioned that central banks should remain attentive to other more volatile components of goods and services, which core inflation statistics ignore, with some remaining higher at 0.9% in August.

The MPC is acutely aware of the impact which negative interest rates can have on banks, therefore, analysts are expecting the stimulus to come in the form of increasing QE, with a consensus expectation of a £50bn increase. The MPC showed no hint that interest rates would be any higher than 0.1% for the next five years at least. This decision has led to a further weakening of the Pound against the US Dollar, alongside the downward pressure from Brexit. The Pound fell by a cent against the US Dollar following the news that the BoE had mentioned the possibility of negative interest rates in this week’s meetings. The Pound fell to US$1.2870, back towards the seven-week lows that were hit a few days ago. Brexit is also weighing on the currency with concerns surrounding the outcome of Brexit negotiations, with Joe Biden, the Democratic presidential candidate in the US elections, warning the UK government not to break the Brexit Withdrawal Agreement with the EU. This may suggest future implications for the UK if Biden was elected, in that he may not be willing to promote dealing and international trade with the UK unless on good terms, whereas Trump is pushing the opposite agenda.

The US has taken a similar stance to the BoE, with their central banks stating that interest rates will not rise until inflation is maintained above 2% for a substantial period. The Federal Reserve (Fed) has said it will continue to maintain a more expansionary fiscal policy for a few years due to Coronavirus. Robert Rosener, senior US economist at Morgan Stanley, has stated that this decision by the Fed is a positive one due to the fact that it is leaning further into promoting the recovery of the US economy, and that will allow inflationary pressures to build without increasing interest rates. This type of decision can behaviourally impact interest rate expectations, investment, and consumption trends. The Fed has also decided not to increase the scale of its bond-buying programme nor adjust the weightings of the securities which it would buy. The Fed has a US$120bn monthly bond-buying programme, with US$80bn allocated to treasury securities and US$40bn to agency mortgage backed securities.
Monetary Policy and Quantitative Easing Programme Updates
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