BOE Preview: Does Bailey have a big bazooka? Only open-ended QE can stun sterling


  • The Bank of England is set to leave its policy unchanged after two emergency moves.
  • Following the Fed's open-ended QE may stun markets.
  • GBP/USD may be more responsive to new loan programs.

Cutting rates to the lowest in 300 years on the fourth day on the job – that is Andrew Bailey's record. The new governor of the Bank of England assumed office on March 16, after having taken part in his predecessor\s decision to slash rates to 0.25% in the previous week.

After the March 19 decision, the bank's lending rate stands at 0.10% and its Quantitative Easing program at £645 billion – up £200 billion from the previous levels. The BOE also announced a lending scheme worth around £100 billion, in its first coronavirus emergency decision and collaborated with the Federal Reserve's plan to enact swap lines to ease pressure on the dollar. 

That has been the frantic action of the BOE so far in March. The long month – which saw the British government move from its "herd immunity" policy to lock down the country – is not over for the bank. The Monetary Policy Committee (MPC) now convenes for the third time in March, this time for a scheduled meeting 

What else can Bailey and his colleagues offer? 

The economic calendar is showing that economists expect the "Old Lady" to leave its policy unchanged. That makes sense after the immense activity earlier this month. In that case, GBP/USD will likely return to rocking in response to the latest coronavirus headlines. This scenario has a high probability.

However, contrary to the Federal Reserve, the BOE did not cancel its scheduled meeting after making an unscheduled announcement. That implies more action may come. 

More QE 

Bailey may further expand the QE program to adjust to growing funding needs by the government. Prime Minister Boris Johnson's three-week shutdown will take its toll on public coffers and will Rishi Sunak's plan to pay 80% of salaries to those who are unable to work. 

An increase to a total of £700 or £800 billion would likely provide a boost to the pound. In standard times, printing pounds – or any other currency – would devalue it. However, in these extraordinary days, more money out of thin air means more fiscal firepower – at least until some point. 

If the BOE goes overboard with a total sum of £1 trillion, it would be even more impressive and could already weigh on the pound. The ultimate sterling stunner would be an open-ended program – following the footsteps of the Fed. Going unlimited could initially send sterling lower, but providing the government more support could eventually boost the currency, albeit not in the immediate term.

These QE scenarios have lower chances as the BOE has already made potent announcements recently. 

More lending

Bailey may prefer using saving this "nuclear option" in the shed and perhaps expand the bank's lending program. By offering cheap funding, the BOE could provide a "bridge loan" to businesses, keeping the economy afloat during the lockdown. 

That would amount to a "shot in the arm" for struggling companies, without printing money en-masse. In this scenario, GBP/USD would have room to run higher. 

This scenario has a medium probability and would strike a balance between taking a break after frantic activity and going "all-in." 

Conclusion

The BOE's third rate decision in as many weeks may result in no new policy measures after it already took substantial steps to support the economy. Governor Bailey and his colleagues may opt for offering more loans, thus helping the economy and boosting sterling. The third option is to add more QE, supporting sterling if done with care and weighing on it – at least in the short-term – if done without limits. The latter scenario has a lower probability. 

See Have stocks bottomed out? Not yet, wait for these three coronavirus-related developments

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