March BoE MPC Preview: Light at the end of the Covid tunnel
By Jeremy Hawkins, Senior European Economist
March 16, 2021
Having seen the February BoE MPC meeting apparently rule out a negative Bank Rate (currently 0.10 percent) for at least six months and with still plenty of headroom left under the £895 billion overall QE target ceiling, there is a strong consensus that Thursday’s BoE MPC announcement will be a low-key affair. A no change outcome is fully discounted in financial markets.
However, although a steady policy looks very likely near-term, just last week BoE Governor Andrew Bailey pointed out that the Bank is working on research into developing a negative interest rate tool as well as determining how best to unwind QE. In other words, the MPC currently sees both downside and upside risks to the economy over the medium-term and wants to be ready to act should either eventuality be realised. Longer-term, it clearly wants to shrink its bloated balance sheet in order to be better placed to tackle the next financial crisis.
For now though, the Bank remains primarily focussed on the labour market and to this end, the Chancellor’s Budget address a couple of weeks ago should have eased some of the monetary policymakers’ most pressing concerns. As part of a fiscal package that provides an extra £65 billion of Covid support measures over this year and next, the key Coronavirus Job Retention Scheme (CJRS) that has done so much to limit the rise in unemployment was extended through September. Joblessness has climbed significantly since the arrival of the virus but would be much higher without the furlough programme and the MPC was clearly worried about what would happen when it was lifted as previously planned in April. The additional six months of the CJRS will give the economy a much better chance of being in a state that can support employment growth without having to resort to yet more help from the government.
Contrary to earlier expectations, the economy managed to grow in the fourth quarter. However, with a new national lockdown in place, 2021 started on a very weak note. January GDP posted a 2.9 percent monthly decline, its worst performance since last April, and February looks likely to have been no better than flat. Growth of manufacturing output, which had a good fourth quarter, has slowed and services remain in recession. Consumer confidence, which has been boosted by the relatively rapid vaccine rollout, is still well below its historic norm and January retail sales saw their sharpest decrease since last April, just after the first virus wave hit.
Brexit is not helping either. While precautionary stockpiling in late 2020 will have distorted the monthly profile, there also seems to have been a (possibly sizeable) negative impact on external trade from the end of the post-Brexit transition period in December. It is impossible to fully disentangle the effects of Brexit from those of Covid-19, but January’s slump in goods trade with the EU, which accounts for around half of the UK’s total goods exports and imports, was much steeper than recorded elsewhere. Indeed, as exports across the Channel were falling more than 40 percent on the month, exports to the rest of the world were rising nearly 4 percent. A survey published last week by manufacturing trade group Make UK found some 74 percent of around 200 leading industrial companies facing delays with EU imports and exports. The Institute of Directors also claims that a fifth of UK companies that trade with the EU stopped doing so in January and that for almost half of these, the cessation would be permanent.
Mounting Brexit red tape and a shortage of customs officials have combined with the coronavirus fallout to create massive backlogs for many companies and, in some cases, products are being turned back despite up-to-date paperwork. The UK government has tried to downplay any Brexit effect but, significantly, last week announced a delay to the imposition of post-Brexit checks on imports coming from the EU until the start of 2022 in a bid to improve import flow. With UK exporters to the EU still facing these checks, the move could push the trade balance deeper into the red.
All that said, the February MPC meeting was notably upbeat about the UK’s post-spring economic outlook. Optimism was in no small way attributable to the vaccine rollout which, since those discussions, has maintained a reassuringly solid pace. At the time of writing, vaccinations per 100 of the population have climbed to around 38, about four times the rate seen in the Eurozone. Combined with a dramatic fall in new infections, this has not gone unnoticed in the FX markets where the pound has been a standout performer so far this year. Indeed, the success of the rollout may be one reason why, in contrast to its European counterpart, the UK’s monetary authority has not seemed particularly worried about the recent back up in yields.
Against this backdrop, the MPC will probably feel under little pressure to change policy this week. A fall in total output this quarter could well be less than the 4.2 percent forecast by the BoE in February and the Budget should only serve to bolster the central bank’s expectations for a solid recovery in the latter half of the year. Uncertainty levels remain high enough to ensure that an ease is still a possibility at some point but, for now, the Bank can probably see at least some light at the end of the Covid tunnel.