BOE announces its August monetary policy decision - 5 August 2021

  • Prior 0.10%
  • Bank rate vote 8-0
  • Gilts purchases £875 billion
  • Corporate bond purchases £20 billion
  • Total asset program £895billion (unchanged)
  • Gilts purchases vote 7-1 (Saunders dissented)
  • UK GDP expected to have risen by 5% in Q2
  • UK GP expected to grow by around 3% in Q3
  • UK GDP will reach pre-pandemic levels in Q4 2021
  • Strength in global inflationary pressures expected to be transitory
  • Inflation projected to fall back to close to the 2% target
  • There is uncertainty about the impact of reducing the stock of purchased assets on monetary conditions
  • Will judge it appropriate to begin reducing stock of purchased assets at a time when markets are functioning normally
  • Should economy evolve broadly in line with central projections, some modest tightening of monetary policy over the forecast period is likely necessary
  • When bank rate has risen to 0.50%, and if appropriate given economic circumstances, BOE intends to reduce stock of purchased assets
  • Some modest tightening of monetary policy is likely to be necessary to be consistent with meeting inflation target in medium-term

There weren't much changes with the pound moving a bit all over the place in reaction to the meeting decision. Saunders was the sole dissenter against expectations of a 6-2 vote but that isn't quite the key highlight in my view.

The BOE moved to reduce its policy rate threshold to unwind QE from 1.50% to 0.50% and that arguably has stronger implications for forward guidance.

It means that there is a lower threshold for the bank rate to explore as a push to 0.50% will see quantitative tightening do some lifting in terms of overall policy tightening.

Besides that, the central bank continues to brush aside inflation as 'transitory' but that was very much expected going into the meeting anyway considering economic circumstances.

The pound had a mini-whipsaw between 1.3905 to 1.3945 but is settling around 1.3915 currently and on the balance of things, I think the lower threshold for unwinding QE, while seemingly hawkish, isn't really that bullish for yields and the currency.

In essence, the BOE will allow quantitative tightening to do more of the work rather than rely on the bank rate. But at the end of the day, it also depends on the strength and nature of the recovery, so the two may also go hand-in-hand.