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United Kingdom Monetary Policy May 2021

United Kingdom: BoE keeps rates and total stock of asset purchases unchanged in May, but reduces pace of bond buying

At its meeting ending on 5 May, the Bank of England (BoE) maintained the bank rate at the record low of 0.10%, where it has been since March 2020. Moreover, the Bank agreed to keep the total stock of investment-grade corporate bonds and UK government bonds at GBP 895 billion. However, the BoE decided to reduce the pace of bond purchases.

On one hand, a brightening domestic panorama thanks to the vaccination rollout led the Bank to markedly upgrade its 2021 GDP growth forecast (from 5.0% to 7.3%) and meant that further monetary easing was not warranted. Moreover, the decision to taper bond purchases—even though the Bank stressed this should not be interpreted as a change in monetary policy—at least signaled that authorities are relaxed about the impact of higher bond yields and confident in the strength of the recovery. However, it was still premature to raise rates or reduce the total stock of asset purchases, due to still-elevated uncertainty linked to the virus.

Forward guidance grew more hawkish and suggested that concerns over low inflation have diminished: In its communiqué, the BoE replaced last meeting’s pledge to take “additional action” if inflation weakened, instead stating it would simply take “whatever action is necessary to achieve its remit”. Our panelists still see the bank rate at its current level until 2023, although a reduction in the quantitative easing program is likely before then. The next policy announcement will be on 24 June.

According to Kallum Pickering, senior economist at Berenberg:

“We expect the first rate hike from its current historic low of 0.1% to come in 2023. However, with its vastly expanded toolkit – including credit policies and macroprudential tools – the first steps towards a less aggressive monetary and financial policy may come in 2022. Upside risk to growth and inflation skew the chances for the first rate hike towards late-2022.”

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