BOE Set for $130 Billion QE Boost as U.K. Enters New Lockdown

The Bank of England is poised to announce a new round of monetary stimulus on Thursday with an early morning decision as the U.K. starts another pandemic lockdown.

Economists expect the BOE to increase its bond-buying target by 100 billion pounds ($130 billion) to 845 billion pounds, with a chance of even more.

The decision was moved forward to 7 a.m. in London, from midday, to give room for Chancellor of the Exchequer Rishi Sunak to address Parliament on the governments support for businesses and households.

BOE Role

The BOE is indirectly financing the huge increase in government borrowing

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Source: Office for Budget Responsibility, Bloomberg survey

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In common with other European nations, the U.K. is stepping up its stimulus efforts as the resurgent coronavirus forces the closure of bars, restaurants, and non-essential shops.

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The government has already stepped up its economic support, extending the 80% wage-support program for employees and self-employed workers and offering homeowners longer mortgage holidays. The job aid had been due to end on Oct. 31 and be replaced by less generous assistance.

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Sunak will address the question of whether the furlough support will be available to other parts of the country in lockdown, such as Scotland and Wales, beyond the current end date of Dec. 2, according to a person familiar with the matter. will address the question of whether the furlough support will be available to parts of the country in lockdown beyond the current end date of Dec. 2, according to a person familiar with the matter.

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Click here to follow our BOE TOPLive blog on Thursday

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With government spending surging and the BOEs key interest rate near zero, bond purchases have proved to be the favored measure of officials to counter the crisis. Those purchases soak up increased debt issuance, keeping markets stable and borrowing costs affordable.

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“Our crude working assumption continues to be that the BOE calibrates its purchase program to roughly match the size of the fiscal deficit,” said Peder Beck-Friis, a portfolio manager at Pacific Investment Management Co LLC in London. They “could possibly afford to wait until the December meeting before announcing more QE. But given the deteriorating macro situation, we expect the BOE to act already this week.”

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Jobs Hit

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Redundancies have surged in the U.K. in recent months

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Source: Office for National Statistics

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The BOE could also accelerate the pace of its buying. Officials have insisted they still have ample headroom for more QE, with Deputy Governor Dave Ramsden pushing back on suggestions that the central bank is already close to its self-imposed limits.

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Updated forecasts published alongside the announcement will give the central banks first full assessment of the economy since August. Economists at the bank will be tweaking these to the last minute after Prime Minister Boris Johnson unveiled the lockdown plan last weekend.

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The initial closures in the spring caused the biggest quarterly economic contraction in three centuries. Many economists foresee another drop in output in the final three months of the year.

The BOE also has the option of cutting its benchmark interest rate rates to zero or below from the current 0.1%. Thats largely seen as an option for the future as the bank considers the operational implications. Investors see a possible move below zero next year.

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Jobs will be key to the Monetary Policy Committees thinking. Though Sunak has extended furlough payments, the program had already been tapered and many job cuts may already have been set in motion.

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Even before any new restrictions were announced, job losses jumped the most on record in the three months through August.

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That‘s just part of an increasingly fragile recovery. The economy’s poor performance in August means growth is unlikely to have met the BOEs previous expectations for an 18.3% third-quarter jump.

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Now, the new lockdown could prompt a 3% contraction in the fourth-quarter, according to Bloomberg Economics.

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“Lockdown measures by the U.K. government increase conviction that BOE action is likely,” said Peter Goves, a fixed income research analyst at MFS Investment Management. “This was already consensus due to the acceleration of Covid-19 cases amid a slowing U.K. economy.”

— With assistance by Andrew Atkinson, and Fergal O'Brien