What to expect from today’s Bank of England decision By Investing.com

By Samuel Indyk

Investing.com – The Bank of England is today expected to unanimously keep the bank rate on hold at a record low of 0.1%. The central bank will also unanimously vote to keep its QE total unchanged but they could slow the pace of purchases as the economy continues to show signs of improvement.

The Bank of England has been purchasing £4.44bln worth of bonds three times a week since August last year, taking total purchases to around £798bln, around £77bln below the full envelope which it plans to reach by the end of this year.

If you include reinvestments, which will be roughly £33bln, the bank has a total of £110bln of purchases to make until the end of 2021, equivalent to around £3.2bln per week.

“Even if it announces a taper on 6 May, the step downwards is unlikely to be too drastic,” said HSBC in a research note.

“This might be an argument in favour of taking the step now. Leaving it till later would mean tapering more sharply.”

However, analysts at UBS think the BoE should tread more carefully and wait until the August meeting before announcing any tapering decision.

“We reiterate that waiting for more evidence of the impact of reopening seems a wiser course, and also means the MPC will be able to engineer a more material tapering, from £4.44bln to £2.75bln per week, if it waits until the beginning of August,” UBS analysts said.

“In addition, it means the hard stop to QE at the end of the year will be less of a shock if purchases taper to zero from this lower weekly amount.”

Economic forecasts

The Monetary Policy Committee is expected to revise up its growth forecasts following the early success of the vaccination programme and the strong early growth indicators since the economy has started to reopen.

UBS expects the 2021 GDP forecast to be revised higher from 5% to above 6%, with the 2022 and 2023 forecast broadly unchanged.

Inflation forecasts are unlikely to change too much with UBS expecting the CPI forecast to remain around the 2% inflation target in the medium term.

Impact on GBP

GBP is not only facing the Bank of England decision but local elections are also ongoing in the UK today. The key election for GBP is happening in Scotland where voters select members of Scottish Parliament.

If the Scottish National Party (SNP) win enough seats for a majority there is suggestion that this could weigh on GBP amid increased risk of another vote on Scottish independence.

Viraj Patel of Vanda Research says if the SNP wins a majority and the Bank of England is relatively dovish, GBP/USD could fall by as much as 1.5%. On the other hand, a more hawkish Bank of England and the SNP failing to win a majority could see GBP/USD rising by as much as 1.1%.