Bank Of England – Slowing The Drug Of QE As Patient Recovers

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“We’re not out of the wood yet but the path is becoming clearer is the view of the economy being taken by the Bank of England today as it left its monetary policy largely unchanged but started to tinker around the edges.

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Bank Of England Is Willing To Ease The QE Drug

After administering a huge dose of medicine to help its patient through the pandemic, it’s signalled it’s willing to ease the quantitative easing (QE) drug, by slowing the rate of government bond purchases, although they will still hit £875 billion.

An impressive rebound in the services sector, following the advances in manufacturing output in April are fresh brush strokes painting a picture of recovery and the economy is expected to show a growth spurt in the second quarter, but faint clouds are still etched in the background.  Although the Bank has raised its growth forecast to 7.25% this year, up from 5%, the Bank says the outlook is still uncertain and will depend on how the pandemic evolves and how financial markets and households respond. It may be the fastest pace of growth since World War II but it shows the deep pain the pandemic has wreaked on the economy, with scars expected to linger in the worst hit sectors.

Energy Costs To Rise Further

A fresh rise in prices is expected, led by energy costs which have already lit a fire under inflation. But the bank is expecting a slow burn in consumer spending, rather than a big splash of cash igniting soaring prices. Households are forecast to spend around 10% of the savings they have accumulated over the pandemic, but over the next three years. This may be partly why the Bank is forecasting that although inflation is likely to creep over its 2% target it won’t linger there for long."

The extension of the furlough scheme in the Budget means the Bank is much more upbeat about unemployment figures later this year. The scheme is now set to continue through the period of lower growth, so by the time it comes to an end, GDP should have all-but recovered. Currently 4.2 million are furloughed and the Bank is forecasting that will fall to around 2.75 million in the second quarter and 0.5 million in Q3, before most people on the job retention scheme return to work. It expects the unemployment rate to peak at 5.5% in Q3 this year, well below its previous projections, helping colour in the picture of a strong rebound in economic growth."

Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

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