May 6, 2020 / 11:03 PM / 24 days ago

Bank of England expected to hold off on fresh stimulus for now

LONDON, May 7 (Reuters) - The Bank of England is unlikely to add to its enormous stimulus for Britain’s economy on Thursday, but the historic hit to output and jobs that it is set to spell out will raise the prospect of yet more bond-buying before long.

In March, as much of the world economy went into a coronavirus lockdown, the BoE ramped up its asset purchase programme by a record 200 billion pounds ($247 billion) to counter a surge in borrowing costs on financial markets.

Similar to other central banks, the BoE is now burning through 13.5 billion pounds of its expanded war-chest every week, helping the government’s surge in public spending but putting it on course to use up its firepower by early July.

Most analysts polled by Reuters say the BoE will probably sit tight when it announces the outcome of its May meeting at the earlier-than-usual time of 0600 GMT.

Instead, it is expected to set up a June increase in its quantitative easing programme with a set of forecasts that will make clear the urgency of further action.

Governor Andrew Bailey and some of his colleagues have already said a 35% crash in economic output in the second quarter, as suggested by the government’s Office for Budget Responsibility (OBR), is not implausible.

David Owen, an economist with Jefferies, said the BoE’s forecasts could be just as severe.

“I think they will ‘kitchen sink’ it,” he said. “Rather than suggesting a profile for growth that looks pretty optimistic, they will basically do what the OBR did a few weeks ago.”

The BoE will also try to assess when the economy might start to recover from its coronavirus deep freeze, and how much long-term damage will be done in the meantime as workers are fired and companies close.

Some officials have already said a drawn-out recovery is more likely than a quick one, raising the prospect of inflation falling far below the BoE’s 2% target and paving the way for more stimulus.

The BoE cut interest rates twice in March to a new low of 0.1%. But Bailey and other BoE policymakers have signalled they do not favour taking rates below zero, saying it would risk a contraction in bank lending.

That leaves the BoE’s massive bond-buying programme as its main tool for nursing the economy.

Rob Wood, an economist with BofA Securities, said the BoE might slow the hectic pace of its gilt purchases but signal it will keep on buying until it is confident that risks to the economy have receded or that inflation will hit its target.

“This could be construed as open-ended QE,” Wood said.

As the BoE buys ever more government debt, it has had to address concerns that it risks sacrificing its independence.

Rate-setter Gertjan Vlieghe last month said the BoE’s transactions might appear similar to what the central banks of Germany during the Weimar Republic or Zimbabwe did as they ushered in runaway inflation.

But the difference was the BoE was not following government orders and would stop bond purchases before they posed an inflation risk, he said.

Also on Thursday, the BoE’s Financial Policy Committee is due to say how much lending it thinks the economy will need from Britain’s giant financial services sector and how well placed the banks are to provide it. ($1 = 0.8091 pounds) (Writing by William Schomberg; Editing by Mike Collett-White)

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