What to expect from today’s Bank of England meeting

The pound has been stuck in a relatively narrow range against its peers as investors brace for this afternoon’s Bank of England meeting.

We think that interest rates are highly likely to remain unchanged, although we see a strong possibility that the BoE will increase its bond buying programme for the second time since the onset of the pandemic. According to the latest data on Bank of England gilts holdings, the existing QE programme will reach the £645 billion capacity by late-July at the current pace of purchases, i.e. before the following MPC meeting in August. We therefore think that an increase in stimulus will be required now in order to keep yields suppressed and ensure that businesses and households have access to cheap funding.

We are therefore pencilling in a £100 billion increase in asset purchases, which would bring the programme to an overall size of £745 billion. We think that a £100 billion increase in the asset purchase programme is already largely priced in by the market. An increase in purchases of this magnitude would therefore not materially shift the pound, in our view. As has been customary during the current crisis, we think that a larger package of measures in excess of £100 billion would likely support sterling. By contrast, a smaller increase, or lack of immediate action would, we believe, likely trigger a fairly sharp move lower in the currency.

The BoE’s policy announcement, statement and minutes will all be released at midday this afternoon.

High-risk currencies remain on the back foot

Elsewhere in the markets, investors remained in a cautious mood, continuing to favour safer currencies over those deemed as high-risk.

The latest virus numbers, particularly out of the US, remain a cause for pessimism. A handful of US states are continuing to report record high daily case numbers, while much stricter containment measures are being reintroduced in Beijing in order to prevent reinfection there. This has included the closure of schools and the halting of around two-thirds of all outbound and inbound flights.

News that a relatively cheap steroid, Dexamethasone, can be used to materially lower the chance of death from COVID-19 is highly encouraging. Even still, risk assets have remained on the back foot in the past 24 hours - perhaps at least in part due to the recent flare up in geopolitical tensions between both India & China and North and South Korea.

Aside from today’s BoE announcement, investors will be awaiting this afternoon’s US initial jobless claims number for signs of a continued slowdown in the rate of job losses across the pond.