Bank of England Passes On Opportunity to Confront a Surge in Bond Yields

LONDON (Capital Markets in Africa) — The Bank of England vowed not to withdraw support to the economy until there’s clear evidence of a recovery in the U.K. but sidestepped an opportunity to calm a surge in market interest rates.

The central bank’s Monetary Policy Committee made no change to its target for asset purchases of 895 billion pounds ($1.2 trillion) and maintained the weekly pace of its stimulus program. While that was widely expected, it stood in sharp contrast with the European Central Bank, which pledged last week to counter rising yields by accelerating its purchases in the market.

The decision reflects a combination of a slightly brighter economic outlook, driven by the U.K.’s bold vaccination drive, as well as concern over heightened uncertainty and a likely surge in unemployment after three national lockdowns. Minutes of the meeting showed a range of views about how the economy will evolve.

“There was a range of views across MPC members on the degree of spare capacity in the economy currently, whether demand would outstrip supply during the recovery from the pandemic,” the BOE said in a statement on Thursday.

The committee also noted that overall financial conditions are “broadly unchanged” since February. While government bonds pared losses after the decision, the yield on 10-year gilts remained near a one-year high.

“The bank seems relatively comfortable with the idea that the market moves reflect an improving growth and inflation outlook rather than an adverse and undesirable tightening in financial conditions,” said Luke Bartholomew, senior economist at Aberdeen Standard Investments.

The decision follows a steady increase in bond yields around the world in the past few weeks, reflecting optimism that the worst of the pandemic is past and growth is about to resume. While investors have focused on signs of rising inflation, central banks have sought to temper that with assurances that there are few signs yet of a need to tightening of policy.

What Bloomberg Economics Says…“The minutes of the Bank of England’s March meeting did little to suggest any alarm about the recent rise in bond yields. Still, it offered a reminder to investors that it’s ready to loosen again if the recovery disappoints and there’s a higher-than-usual bar for tightening policy.” — Dan Hanson, senior economist. Click here for full REACT.

The ECB last week pledged to accelerate the pace of its asset purchases. Federal Reserve Chair Jerome Powell on Wednesday repeatedly stressed that rates won’t rise until the U.S. economy shows tangible evidence it has fully healed from Covid-19.

Bailey has carefully balanced his recent remarks, stressing both upside and downside risks to the bank’s forecast for a recovery this year. On Monday, he said rising gilt yields are “consistent with the change in the economic outlook.”

Britain has enjoyed a run of positive economic news since the bank’s last meeting in February. Output fell less sharply than expected in January, and Chancellor of the Exchequer Rishi Sunak delivered a dose of the fiscal stimulus earlier this month. Prime Minister Boris Johnson plans to lift most lockdown rules by the middle of the year, allowing shops to open in April.

There are substantial risks too. Vaccination efforts are bogging down in continental Europe, where countries including Italy have tightened rules to hold back a resurgence in infections. Also, Britain’s trade with the European Union plunged in the first full month after it left the common customs area. While Johnson describes that as “teething pain” that will soon pass, high-frequency data point toward a sustained drop in goods crossing the English Channel.

Inflation is about to surge after remaining well below the BOE’s 2% target for 1 1/2 years. Although economists expect it climbs near the goal in 2021, that will mostly be driven by temporary factors such as energy prices that the BOE has indicated it can overlook.

Only the central bank’s Chief Economist Andy Haldane has warned about inflation, saying a “tiger has been stirred” that may “prove difficult to tame.”

Unemployment, which registered 5.1% in the three months through January, is due to an average of 6.5% this year, according to the BOE’s forecast.

Source: Bloomberg Business News