March 16, 2020 / 2:27 PM / 16 days ago

BoE to restart asset purchases this month, say economists: Reuters poll

LONDON (Reuters) - The Bank of England will soon follow up last week’s surprise interest rate cut by restarting its asset purchase program as it battles to reduce the economic impact of the global coronavirus outbreak, a Reuters poll found.

The BoE’s 50 basis point cut last week to 0.25% was its first move outside of a scheduled policy meeting since the global financial crisis over a decade ago, and followed a similar cut by the U.S. Federal Reserve.

The Fed then slashed rates by another 100 basis points on Sunday to its previous post-crisis effective zero bound of 0-0.25% and re-started asset purchases, saying it intends to buy at least $700 billion total of Treasuries and mortgage-backed securities soon.

The COVID-19 virus that originated in China before spreading around the world has triggered a global stock market crash as governments shut schools and restrict travel and large gatherings, crushing factory output and disrupting business worldwide.

London-listed stocks have tanked, and sterling GBP= weakened to a five-month low against the dollar on Friday, although it made some gains on Monday following the Fed's move.

The latest Reuters poll of 35 economists, taken in the run-up to the Fed’s aggressive weekend moves, showed they already expected the BoE to re-start its asset purchase program, which it last said it would increase in August 2016.

Fourteen economists who answered an additional question said more such quantitative easing (QE) was on the way, while only five said it wasn’t.

“It is likely that the BoE will resume asset purchases in March, largely because it will seek to deploy all measures at its disposal. Now is the time to be throwing everything at the problem,” said Peter Dixon, an economist at Commerzbank.

Markets have not priced in a cut, and most in the poll expected Bank Rate to remain steady at 0.25%, a level the BoE had indicated was the floor for rates before the latest crisis.

Six expected the Monetary Policy Committee to trim it to 0.10% this month, and one had a forecast for zero.

“We now think the BoE will follow this with a further 15 basis points rate cut at the next scheduled policy meeting on 26 March, taking Bank Rate to 0.10%. We also expect a restart of the QE program,” noted Simon Wells, chief European economist at HSBC.

New BoE governor Andrew Bailey, who succeeded Mark Carney as governor earlier on Monday, told BBC News the BoE was “very keen” to ensure short-term damage to the economy did not permanently impair Britain’s longer-term growth prospects.

“That’s why you saw prompt action last week, that’s why you will see prompt action again when we need to take it, and the public can be assured of that,” Bailey said.

The BoE’s March 11 emergency rate cut came just hours before the government announced a 30 billion pounds stimulus plan in a double-barrelled response to the crisis.

Budget forecasters said the overall fiscal expansion was the biggest since 1992. But already concerns about the coronavirus’ spread and its knock-on effect on companies and markets suggests that stimulus will not be adequate.

Economists again trimmed their growth forecasts in the latest poll. The economy is expected to expand by 0.1% this quarter and then contract 0.3% next quarter, a sharp revision from the 0.3% expansion they had expected before.

In a worst case scenario, the economy was forecast to contract 1.0% next quarter and by 0.7% in 2020. Forecasts were as low as -5.0% and -3.0%, respectively, with no economist expecting growth in either period in the worst case.

“There is no sense in putting a precise number on it but it is possible to imagine a contraction well in excess of 1%, depending on the extent to which domestic demand slows and exports are disrupted,” said Dixon.

However, the median forecasts from the wider poll predicted the economy would expand 0.5% this year and 1.2% next.

Adding to the uncertainty, the transition period after Britain left the European Union at the end of January is due to expire at the end of the year, and the two sides have yet to make much progress at all on their future relationship.

The likelihood the two sides part ways without a deal was 30%, the poll median showed, up from 25% in last month’s survey.

(For other stories from the Reuters global long-term economic outlook polls package)

Polling by Khushboo Mittal and Richa Rebello in BENGALURU; Editing by Hugh Lawson

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