Sponsored article: With the UK gradually unlocking, Michelle Randall reviews the economy and sterling market outlook.
Last month, the Bank of England’s (BoE) Monetary Policy Committee assessed that the existing stance of monetary policy remained appropriate.
They voted unanimously to keep the Bank Rate at 0.10%. The Committee voted by a majority of 8-1 for the BoE to continue with its existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875bn and therefore the total target stock of asset purchases at £895bn.
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The Monetary Policy Committee stuck with its patient approach of re-affirming the risks of a premature tightening.
Outgoing chief economist, Andy Haldane, was once again dissenting, arguing for a cut of £50bn to the current QE program. This was the last meeting for Haldane as he stepped down from the MPC and his, after a 30-year career at the Bank of England.
The meeting was more dovish than the market had been expecting with market rate expectations
falling afterwards.
Inflation
We have seen inflation accelerate to 2.5% (versus the BoE’s expectation of 1.8%), the first-time inflation has been above the 2% target since July 2019.
The BoE only expected this for late 2021 and is now on course to possibly exceed 3%, peaking higher than previously anticipated.
Initial thoughts were for high inflation to be temporary, however in recent weeks MPC members appear split on how persistent this will be, fuelling a wider debate as to whether policy changes may be needed earlier than first thought as post-lockdown demand increases and amidst supply shortages persisting. Growth has been closer to BoE expectations, even before the lockdown restrictions were eased, suggesting continued momentum over Q3.
Sterling
Turning to sterling, money market credit yields are flatter and tighter: 1-month GBP LIBOR has remained steady since March 2021 at around 0.05%, 3-month GBP LIBOR dropping slightly to 0.07% as short-term rates continued to be below BoE Rate.
We expect LIBOR to remain relatively stable because of low rates at the front end of the curve and the viable credit environment in money markets with levels moving lower as we look to invest over year end.
The market pricing for UK rates over the coming months and years have recently been brought forward, after comments from BoE MPC members. Current expectations are now 3-month 0.11%, 6-month 0.13%, 1 year 0.25%, 2 year 0.46%. Our central case is we expect the BoE to maintain Bank Rate at the current level of 0.10% for the remainder of 2021 and 2022, tilting towards a possible increase H2 2022.
Covid
While the UK government pressed ahead with removing most remaining Covid-19 restrictions from 19th July 2021, increasing numbers of cases are being reported daily.
How this develops during Q3 is probably one of the most important variables going forward, as it will tell us a lot about inflation and growth.
The successful UK vaccine program appears to have reduced the link between hospitalisations/deaths, though one downside risk is new variants of Covid that could have an impact, causing some market stress while risks persist with the delta variant until the outbreak is brought under control and the UK economy fully reopens on a sustainable footing. We look towards the August meeting (and MPR) as the time to reassess the economy more fully.
Michelle Randall is portfolio manager, Invesco Global Liquidity.
Photo: Bank of England, Flickr.
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