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BoE increasingly positive over UK economic outlook

Bank of England (BoE) Governor, Andrew Bailey stated that the UK’s economic outlook is becoming increasingly positive as non-essential businesses prepare to reopen on April 12th.

The Governor indicated that the UK was not ‘out of the woods’ but suggested that the UK economy could improve quickly than initially anticipated. “The economic effects of the restrictions appear over time to be reducing. That’s good news, but let’s be realistic. It’s not more than getting back to where we were pre-Covid” Mr Bailey said to the BBC.

The BoE introduced significant amounts of quantitative easing measures throughout 2020 in a bid to buoy the UK economy. Last June, the bank increased its quantitative easing program by GBP 100bn in response to the pandemic and again in November 2020 by GBP 150,000bn. The bank, however, has indicated that they could consider negative interest rates in the future, should economic recovery be weaker than anticipated.

While higher levels of debt monetisation are being seen in the Eurozone, Japan and the United States, the progress of these economies all remains very uncertain due to a combination of rising cases of COVID-19, extended coronavirus restrictions and limited spending.

Bank Of England. (City of London)

The Bank of England’s quantitative easing measures so far

Since the coronavirus pandemic developed in the UK back in March 2020, the BoE ramped up its QE measures in 2020, injecting up to GBP 895 billion into the UK economy. Whilst some are critical of quantitative easing as it can cause an increase in the price of goods and property, the aim is to encourage spending and stimulate economic growth.

Data revealed that the UK economy contracted by 2.9% in January, which was anticipated as the third national lockdown was introduced, though Q2 is expected to see a sharp recovery.

The Bank of England previously stated that the UK economy could return to normal levels during mid-2022 but have since revised predictions to the end 2021. This prediction heavily relies on the success of UK Prime Minister Boris Johnson’s roadmap plan and the continuation of reducing daily coronavirus cases.

Governor Bailey that UK annual inflation could see a sudden rise from 0.7% to the government’s aim of 2% over the coming months. Mr Bailey, however, criticised claims that the BoE substantial quantitative easing measures could cause a 4-5% rise by the end of 2021.

Chancellor Rishi Sunak announced the extension of furlough during the Spring budget to the end of September, which is likely to add extra weight on public finances. The extension, however, will undoubtedly provide support to businesses as they begin to get back on their feet from next month.

Traditionally, printing more money would devalue a country’s currency, but in the current economic climate, investors are viewing central bank support differently. QE expansions are seen to lower government borrowing costs and stimulate economic growth, and by strengthening the economy, the currency will likely appreciate.

GBP extends losses against USD and EUR

The start of the new trading week has seen the British pound (GBP) slip against both the US dollar (USD) and the euro (EUR) despite Governor Bailey’s positive comments.

The course of the pound Sterling (GBP) could be supported by the outcome of the BoE’s March monetary policy meeting on Thursday, which is expected to be positive. Francesco Pesole, FX Strategist at ING states that “the BoE should keep its constructive outlook in place, with the fast pace of vaccination, with the pace is poised to double from the next week onwards, supporting the optimistic outlook for the economic recovery.”

Markets are not expecting the BoE to go against bond yields as has been the case with the European Central Bank (ECB). However, if the BoE deviates from market expectations, this could trigger significant swings in the British pound’s (GBP) movement.

The British pound to US dollar (GBP/USD) exchange rate is currently trading around USD 1.39 and the British pound to euro (GBP/EUR) exchange rate currently stands at EUR 1.17. It’s anticipated that the Bank of England’s stance will encourage the British pound to recover losses against its major currency competitors, though time will tell if this is the case.

Negative interest rates could weigh heavy on GBP/USD and GBP/EUR

Whilst it’s thought that the value of the British pound (GBP) will edge higher on Thursday, as a result of positive comments from the Bank of England, talks of negative interest rates could cast a shadow over Sterling (GBP).

The central bank’s interest rate has already been cut to an unprecedented low at 0.1%, though it seems unlikely that this will be changed any time soon. Many investors believe negative interest rates have no benefit on the economy, as sub-zero borrowing costs in the Eurozone, Japan and other countries have failed to boost economic growth or inflation.

However, the BoE has previously mentioned that they would turn to negative interest rates if they need to in the future. Any hint that such a move would be on the horizon would likely drag the British pound (GBP) lower against the euro (EUR) and the US dollar (USD), while upbeat comments will allow the pound (GBP) to reclaim its losses.

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