November BoE MPC Preview: Battling a double-dip recession

By Jeremy Hawkins, Senior European Economist
November 3, 2020

Financial markets are convinced that November’s BoE MPC announcement will reveal another significant easing of monetary policy. The combination of a rapidly slowing economic recovery, persistently sub-target inflation, a less generous fiscal stimulus and dramatically rising new Covid-19 cases had already convinced most analysts that additional help would be delivered. Consequently, recent comments from BoE Governor Andrew Bailey pointing out that the UK faces “an unprecedented level of economic uncertainty” were essentially seen as confirming that a move would be made this month. The concomitant release on Thursday of the Bank’s updated quarterly economic forecasts in a new Monetary Policy Report (MPR) similarly gives a nod in that direction.

September’s MPC vote was a unanimous 9-0 in favour of holding Bank Rate at its current record low of 0.10 percent and the overall QE ceiling at £745 billion. This time there is scope for a split on rates reflecting recent conflicting messages from MPC members about the potential benefits or otherwise of a sub-zero Bank Rate. The chances of a cut have been boosted somewhat by news that the Bank has contacted selected financial institutions to determine how well prepared they might be for negative interest rates. However, given the complex technical issues associated with any such action, a move to a negative Bank Rate on Thursday would probably be a little too early for most MPC members. QE though, is another matter. As of late October, the outstanding stock of overall QE (gilts and corporate bonds) was just over £717 billion and so only about £28 billion short of its ceiling. At the current pace of net purchases, the £745 billion limit will be reached before the end of the year and possibly even before the December MPC meeting. Consequently, unless the Bank intends to halt the programme (which is highly unlikely), now would be a good time to indicate what happens next. In June, the last time that the bar was raised, QE was boosted by £200 billion. The market consensus is for a smaller £100 billion increase this time but the risk must be for something larger.

Any shift in policy will reflect a domestic economic recovery that, in terms of output, has slowed significantly since the end of the second quarter. As the pick-up in business activity has broadened out, this was only to be expected but the signs are that total output is already starting to flatline well below February’s pre-pandemic level. Monthly real GDP growth in August was only about a third of its July rate and less than half the market consensus. Indeed, activity in the key services sector was still almost 10 percent short of its February mark.

The deceleration is now starting to have more of an impact on the labour market and the number of people being made redundant nearly doubled to a record 227,000 in the three months to August. To this end, the planned replacement of the government’s Job Retention Scheme (JRS) by a more modest Job Support Scheme at the start of this month has been deferred and the original furlough package (which pays up to 80 percent of wages) will now run through November. Even so, the official jobless rate of 4.5 percent still seems set to climb sharply over coming months. As it is, the BoE already thinks that unemployment is significantly higher than reported by the Central Statistics Office (CSO) and the central bank has not wasted time to point out that downside risks to the economic outlook are starting to materialize and that labour market slack, and hence sub-target inflation, will last longer than previously thought likely. In this environment, inflation may not be the number one variable that it once was on the BoE’s watchlist but having been below the 2 percent medium-term target for some fourteen consecutive months now, its message for policy is clear enough.

Inevitably, it is the coronavirus that continues to dictate the path of the economic recovery and, by implication, the overall stance of monetary and fiscal policy. And to this end, the latest statistics have been ominously bad with new daily cases accelerating sharply to successive record highs. The unexpectedly rapid escalation forced the introduction of an unsuccessful and only short-lived multi-tier containment programme in early mid-October and this will be replaced on Thursday by a full ‘soft’ nationwide lockdown. While not quite as aggressive as the March/April shutdown, the latest restrictions will hit November output hard and most likely trigger a renewed contraction in fourth quarter GDP and a double-dip recession.

Meantime, as if Covid-19 were not enough, there remains considerable uncertainty over the shape of any post-Brexit trade deal between the EU and the UK. The BoE’s Decision Maker Panel (DMP), which consists of chief financial officers from small, medium and large UK businesses, found 52 percent of firms putting Brexit in their top-three sources of uncertainty in September. This was up from 47 percent in August and the highest level since last December – and that even before the turmoil that enveloped the talks last month. As things currently stand, the two sides hope to reach an agreement by the middle of this month but with 15th November thought to be the last possible date if a deal is to be ratified by year-end, there is no time left for any slippage.

Against this backdrop, financial markets will be more than a little disappointed should the MPC opt to leave policy unchanged this week. As the new MPR will no doubt make clear, the near-term economic prognosis has deteriorated significantly since the September MPC meeting. The third quarter economy may well have outperformed the central bank’s original expectations but current quarter GDP is set to undershoot markedly and will need all the help it can get.