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Bank of England set to show it's ready for more stimulus

LONDON (Reuters) - The Bank of England is likely to signal next week that it is getting ready to pump more stimulus into Britain’s coronavirus-hit economy as it faces the double whammy of an expected jump in unemployment and mounting Brexit tensions.

FILE PHOTO: Workers wearing protective face masks walk near the Bank of England in the City of London, Britain, August 6, 2020. REUTERS/Toby Melville

The BoE has enough firepower in its bond-buying programme to last until the end of 2020, so policymakers are likely to limit themselves on Thursday - at the end of their September meeting - to saying they are prepared to act to prop up the recovery if needed in the coming months.

Britain’s economy suffered the biggest contraction of all Group of Seven economies in the second quarter before regaining half of the crash by the end of July.

But the pace of the bounce-back is expected to slow as the government phases out its coronavirus job protection scheme, raising the risk of a jump in unemployment, and trade talks with the European Union are at risk of collapse.

BoE Governor Andrew Bailey and fellow interest rate-setters will also want to see how a recent rise in COVID-19 cases, and new restrictions on social gatherings, affect the economy.

“We expect a more downbeat tone in the September minutes, possibly opening the door to further easing in November,” Elizabeth Martins, an economist with HSBC, said.

Most economists polled by Reuters expect a 9-0 vote by the MPC to keep policy unchanged.

The next increase in the BoE’s bond-buying programme - which has already soared to 745 billion pounds - is expected in November.

The yield on two-year British government bonds hit a record low this week as investors priced in more stimulus.

Analysts at Citi said one or two policymakers might vote to ramp up the quantitative easing programme as soon as next week.

Michael Saunders has said it is “quite likely” that the economy will need more stimulus. Other MPC members have expressed concern that the economy could take longer to recover its pre-crisis size than the BoE’s forecast of the end of 2021.

Only the central bank’s chief economist Andy Haldane has sounded optimistic about the recovery.

Just as the Federal Reserve has said it is planning to keep its foot on the monetary policy gas pedal for years, the BoE is considering how it can get maximum effect from its policy tools with its main interest rate at just 0.1%.

Investors will watch out for any further clues in Thursday’s statement about the likelihood of cutting interest rates below zero for the first time.

Bailey and some of his colleagues have stressed that they are still working out the pros and cons of following the lead of other central banks, including those of the euro zone and Japan, of taking rates negative.

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Writing by William Schomberg; Editing by Toby Chopra

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