A couple of takeaways from the BOE May monetary policy meeting

Author: Justin Low | Category: Central Banks

The BOE starts off with a bit of a technical taper, if you want to call it that

You can call it algos. You can call it a bit of a messy release with some separation between the statement and the monetary policy minutes/report. But at the end of it, the pound looks destined for a brighter outlook when all is said and done.

The pound went for a bit of a messy ride on the BOE decision earlier but has now held steady and is keeping a little higher than before the announcement.

Here are some key takeaways from the decision:

BOE slows down QE purchases
This was the key passage that helped to reverse most of the downside action in the pound:

The existing programme of £150 billion of UK government bond purchases had started in January and its completion was expected by around the end of 2021. As envisaged since the announcement of the programme in November 2020 and consistent with developments in financial markets since then, the pace of these continuing purchases could now be slowed somewhat. The expected completion point of the purchase programme remained unchanged. This operational decision should not be interpreted as a change in the stance of monetary policy. As measured by the target stock of purchased assets, that stance remained unchanged. Further details of the planned operational approach to gilt purchases between the May and August MPC meetings were set out in the Market Notice accompanying these minutes. Should market functioning worsen materially, the Bank of England stood ready to increase the pace of purchases to ensure the effective transmission of monetary policy.
The BOE tried to play down the move by insisting that the £875 billion target remains intact but UBS argues that if they are to slow down the pace of purchases, they will likely have to reduce said target later in the year - possibly around August.

This wasn't an overly hawkish move by the BOE but it does tee up the potential for tapering to take place, if the economic rebound that they expect to follow in Q2/Q3 comes to fruition - helping to justify their more upbeat economic forecasts today.


BOE Haldane dissents and wants to reduce QE purchases now
Haldane was the only "dissenter" as he voted in favour of reducing the emergency QE purchases from  £150 billion to £100 billion, arguing that:

There was now clear evidence that the economy was growing rapidly, with both household and company spending surprising significantly and persistently to the upside, and consumer and business confidence bouncing back. Moreover, looking ahead, there were good reasons for believing this strength in domestic demand would be maintained, including by the running down of the large stock of accumulated savings, leading to a larger and more sustained period of excess demand than was incorporated in the May central projections. With strong cost-push pressures being amplified by demand pull factors, this posed upside risks to meeting the inflation target over the medium term. At a reduced pace of purchases, the proposed reduction in the size of the current programme to £100 billion would mean that it would be completed in August rather than by around the end of 2021. 
The shift in stance is the one of the first few signs we're seeing in the BOE towards being more hawkish again and it is something to take note of. This could set the tone for other policymakers to follow suit once they are more comfortable with the data.

That said, the thing to consider here is that Haldane is not going to be with the BOE for too long as he is due to quit later in the year. So, this is perhaps his one last shot to bring about changes in the central bank so there's that to consider.


What's next for the pound?
While not exactly a firm proposal to start the tapering process, the BOE is taking baby steps in that direction. As such, I don't see how that is a structurally negative factor for the pound no matter what angle you try to approach this from.

Unless the UK economic recovery gets derailed somehow, expect hawkish tones to slowly grow and the pound to remain a buy-on-dips over the next few months.

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