The Bank of England decided to slow its government bond purchase programme amid rising optimism about the economic outlook with the easing of restrictions related to the coronavirus pandemic. The nine-member Monetary Policy Committee decided to reduce the pace of government bond purchases, a move that markets may construe as tapering of the monetary stimulus.
The MPC unanimously decided to leave the key interest rate unchanged at 0.10 percent. The bank raised the growth projections from its February report and lowered its forecast for unemployment.
The weekly bond purchases will be reduced to GBP 3.4 billion from GBP 4.4 billion. However, the bank said this is an operational decision which should not be interpreted as a change in the monetary policy stance. The central bank retained the existing stock of corporate bond purchases at GBP 20 billion and the government bond purchases at GBP 875 billion, taking the size of total quantitative easing to GBP 895 billion.
Andrew Haldane voted to continue with the existing programme of UK government bond purchases, but to reduce the target for the stock of these purchases to GBP 825 billion from GBP 875 billion.
The minutes showed that one member sought a reduction in the scale of asset purchases in the current programme to GBP 100 billion from GBP 150 billion. This would imply that the program would end in August rather than at the end of the year.
The existing programme of GBP 150 billion of UK government bond purchases had started in January and its completion was expected by around the end of 2021.
The next step will be to offer up clues on how it might reduce its bond holdings alongside future rate hikes, James Smith, an ING economist, said.
But despite growing optimism about the recovery, a more benign inflation story next year is likely to see the BoE hold off on tightening until 2023, Smith added.
The MPC said the committee did not intend to tighten monetary policy at least until there was clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2 percent inflation target sustainably.
The bank forecast the UK economy to grow sharply by 7.25 percent instead of 5 percent estimated in February. But, the outlook for 2022 was lowered to 5.75 percent from 7.25 percent, while that for 2023 was retained at 1.25 percent.
According to the Monetary Policy Report, UK GDP will rise around 4.25 percent in the second quarter of 2021, as more people are vaccinated and the Covid-related restrictions ease.
At an online news conference, BoE Governor Andrew Bailey said lets not get carried away by economic forecast figures. It will take the economy back, by the end of this year, to the level of output at the end of 2019 pre-covid period.
That means two years of economic growth have been lost to date, Bailey added.
The jobless rate is seen at 5 percent this year versus the prior outlook of 6.5 percent, before falling to 4.5 percent next year and 4.25 percent in 2023.
Although inflation is below the 2 percent target, it will rise temporarily above the target towards the end of 2021, owing mainly to developments in energy prices, the bank said. The rate is expected to rise to 2.5 percent in 2021 and to return to 2 percent in 2022.