On Thursday night at 20:00, the Bank of England announced its interest rate resolution, keeping the key interest rate at 0.1%, in line with market expectations. The Bank of England kept the total size of asset purchases unchanged at 895 billion pounds, in line with market expectations. The Bank of England’s Monetary Policy Committee unanimously agreed to keep the benchmark interest rate unchanged at 0.1%, in line with previous expectations.
After the Bank of England announced its interest rate decision, the pound was short-lived against the dollar by more than 20 points; the decline in British government bonds narrowed, with the yield on the U.K. 10-year government bond slipping to 0.88%, still up 5 basis points during the day.
In terms of the speed of bond purchases, the Bank of England’s Monetary Policy Committee said that the initial pace of purchases will likely remain near current levels, after which it can flexibly slow down the pace of purchases. That said, the BoE will continue to inject about 4.4 billion pounds of money into the market through bond purchases each week.
The Bank of England said it will not tighten monetary policy until Inflation makes good progress. The central bank expects CPI to quickly rebound to a target level of about 2% this spring, and the Monetary Policy Committee is prepared to act if the outlook for inflation weakens.
On the economic outlook, the Bank of England said that the economic outlook remains uncertain and news about recent economic activity has been positive; the statement also noted that there is currently a considerable degree of idle capacity. The outlook for the U.K. economy, particularly the relative movements in demand and supply during the recovery from the new crown Epidemic, remains exceptionally uncertain.
In response to the rise in Treasury yields, the BoE said that longer-term government bond yields in developed economies have risen rapidly to levels similar to those shortly before the outbreak, largely reflecting the rise in real yields.
At this point, the Bank of England followed in the footsteps of the Federal Reserve and was unwilling to risk scaling back its bond purchases. The Bank of England wrote in a statement that the Monetary Policy Committee will continue to closely monitor the situation. If the inflation outlook weakens, the committee will stand ready to take any additional action necessary.
The Bank of England does not intend to tighten monetary policy until there is clear evidence that significant progress has been made in eliminating idle capacity and achieving the 2% inflation target on a sustainable basis.
Market analyst Jill Ward said that from the statement, the Bank of England policy makers do not seem to be too worried about higher Treasury yields. They said the rise in longer-term bond yields in developed economies reflects stronger-than-expected global GDP growth. Bank of England policymakers still seem reluctant to talk too much about the economic recovery, which could lead to an unfounded tightening of the financial environment.
Market analyst Lucy Meakin noted that in terms of asset purchases, the ECB pledged last week to accelerate the pace of purchases, arguing that rising Treasury yields pose a threat to the eurozone’s already delayed recovery. But so far, Bank of England Governor Tony Blair has been downplaying this as a reasonably optimistic sign of an impending economic rebound.
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