A woman wearing a protective face mask crosses the road in front of the Bank of England in what would normally be the morning rush hour in the City of London on March 17th, 2020. The financial district of the UK is unusually quiet after the government requested people to refrain from all but essential travel and activities yesterday.
The Bank of England will announce its latest monetary policy decision before the opening bell on Thursday as the U.K. navigates an emergence from lockdown measures and crucial Brexit talks with the EU.
Although the market does not expect the central bank to alter its base lending rate or deploy any further fiscal stimulus, signs of a second wave of coronavirus infections and the potential for mass job losses when the government’s furlough scheme ends in October could dent its previously optimistic projections for a V-shaped economic recovery.
The BOE announced an additional £100 billion ($131.4 billion) expansion of its bond-buying program in June, taking the total value of the central bank’s Asset Purchase Facility (APF) to £745 billion.
The Bank also held its main lending rate steady at 0.1%, having cut rates twice from 0.75% since the beginning of the coronavirus pandemic.
While the existing accommodative monetary policy stance is expected to remain unchanged, the Monetary Policy Committee’s new quarterly projections could include a shift in tone.
Alan Custis, head of U.K. equities at Lazard Asset Management, suggested that May’s projection of a V-shaped recovery now looks “out of kilter” with current market expectations.
“We would expect the Bank of England to upgrade its GDP (gross domestic product) expectations for 2020, but at the same time lower its expectations for 2021, as the risk of a second virus wave, and further disruption suggests it had been too optimistic,” Custis said Wednesday.
“Longer term the recovery in the U.K. economy is likely to be protracted and at a lower level than other economies as the effects of leaving the EU also weigh on expectations.”
The U.K. is currently embroiled in tense discussions with EU leaders in a bid to hammer out a new trading relationship. Should talks fail, the U.K. would face a sudden exit from its transitional period without a deal at the end of the year, a scenario widely expected to compound the economic damage caused by the pandemic. The next round of talks is set to commence on August 17.
“We judge that the current level of the broad GBP implies that a U.K./EU-27 FTA (free trade agreement) being struck by year-end is about as likely as one not being struck (in terms of market-implied odds),” BMO Capital Markets European Head of FX Strategy Stephen Gallo said in a note Tuesday.
“The Bank’s assumptions for growth and inflation (H2 2020 & FY 2021) are likely to be tweaked, but the high level of uncertainty surrounding virtually all forecasts means that market participants will probably assign very low weights to their importance.”