Bank of England maintains bond buying programme at £895bn
On Thursday the Bank of England (BoE) upgraded its outlook for the UK economy, while reaffirming it is in no rush to reduce the levels of support it has been providing to buoy a recovery from the Covid-19 crisis.
The BoE also passed an unanimous 9-0 vote to keep interests rates at 0.1%, as expected, as well as maintaining its bond buying programme at £895bn.
The UK central bank drew attention tp recent bond market selloffs, suggesting that the rise in bond yields largely reflects improved economic prospects.
“[Since the February forecasts] developments in global GDP growth have been a little stronger than anticipated, and the substantial new US fiscal stimulus package should provide significant additional support to the outlook,” the BoE said.
However, the bank did add that the UK’s outlook remained uncertain, and would depend on the evolution of the pandemic and how various segments of the UK economy respond as time progresses.
The BoE said the Monetary Policy Committee (MPC) stands ready to “take whatever additional action is necessary to achieve its remit,” if the outlook for inflation weakens.
It added that there was no intention to tighten monetary policy until it is clear that progress is being made in “eliminating spare capacity and achieving the 2% inflation target sustainably”.
Laith Khalaf, financial analyst at AJ Bell, retraced the BoE’s steps over recent weeks, drawing the conclusion that things are looking up.
“Since the beginning of last month, markets have gone from worrying about negative interest rates in the UK, to pondering when monetary policy might tighten. The Bank of England provided a pretty bullish assessment of the prospects for economic recovery in its February monetary report and since then the outlook has got even better,” said Khalaf.
“Further support from the Chancellor in the Budget, a roadmap out of lockdown and fiscal stimulus spilling over from the US, all support the case for a robust bounceback, as the UK economy opens up in the coming months.”
Khalaf also drew attention to the risk of rising inflation under the BoE’s current interest rates policy, as well as the central bank’s approach.
“But the message coming through from the Bank of England is that interest rates are going to remain nailed to the floor for the foreseeable future, despite the improving economic picture. The only thing that might prise rates upwards is a bout of inflation, but that would need to be both sustained and structural to compel the Bank of England to tighten policy.”
“The Bank will look through rising inflation caused by temporary factors, such as recovering energy prices and would only deem inflation to be problematic if the UK was near full employment, which isn’t going to happen this year, or probably next.”