BOE Upbeat about Inflation Outlook. Negative Rate Seems Unlikely although It is Not Ruled Out

As expected, BOE left the Bank rate unchanged at 0.1%. Meanwhile, the QE program also remains at 875B pound worth of government bonds, and 20B pound of corporate debt. The economic projections reveal that policymakers are more optimistic about inflation projecting it to reach the +2% target this year. This signals that further rate cut might not be necessary although the members still leave the door open for negative rate. British pound’s rally accelerated after the announcement

On the economic outlook, BOE upgraded the GDP growth forecast for 4Q20 but downgraded that for 1Q21, as well as for the full year. The central bank also upgraded the growth estimate for the year of 2022. GDP is expected to have gained modestly in 4Q20, better than a contraction projected in November. The economy is, however, expected to drop -4% in 1Q21. As noted in the statement, the country’s economy is expected to “fall by around 4% in 1Q21, in contrast to expectations of a rise in the November Report”. Yet, the economy is projected to “recover rapidly towards pre-Covid levels over 2021, as the vaccination program is assumed to lead to an easing of Covid-related restrictions and people’s health concerns”. For 2021, GDP probably would expand +5% y/y, down from +7.25% projected in November. BOE has upgraded GDP growth for 2022 to +7.25%, from +6.25% projected in November. Inflation is expected to rise sharply from last year’s subdued level. Inflation is expected to reach the +2% target this year, from just about 0.5% in 2020. The unemployment rate was revised up slightly for this year and in 2023.

The central bank continued to leave the door open for negative interest rate. However, the members do not seem enthusiastic about the implementation. The policy statement reviewed recommendation from the Prudential Regulation Authority which indicated that “implementation of a negative Bank Rate over a shorter timeframe than six months would attract increased operational risks”. The more upbeat economic projections signal that a further rate cut to negative might not be necessary.