Bank of England rate preview: economic forecasts key as UK recovery takes shape

When and where?

The Bank of England (BoE) will commence their latest monetary policy announcement at midday, on Thursday 6 May 2021.

Tune in to IGTV’s live BoE announcement and analysis at 11:55 AM BST on Thursday in the IG platform.

How is the economy faring?

With the UK having administered over 50 million vaccine doses across 34 million people, we have seen over half the country protected against the coronavirus that has wreaked havoc over the past year.

The success of that vaccination drive does form the basis of an increasingly optimistic outlook from central bankers and economists alike. Importantly, the first reopening step taken on 12 April appears to have little material effect on the level of Covid-19 cases, while daily deaths have moved within touching distance of zero.

While the next step of the reopening could bring fresh strains of Covid-19 into the country if non-essential international travel resume as expected, we are clearly seeing signs that these vaccines are efficient at avoiding hospitalisations and deaths of variants.

Notably, professor Neil Ferguson has stated that while restrictions could be tightened somewhat in the case that fresh strains propagate in the UK, we are unlikely to see another lockdown thanks to the vaccination efforts.

Looking at the latest purchasing managers' index (PMI) release, the UK economy is clearly in the midst of a historic rebound. The recent loosening of restrictions have helped release some of that built up demand, with April seeing the fastest private sector growth since 2013.

The surge across both services and manufacturing has helped drive the composite PMI sharply higher, raising expectations that growth will follow suit in quarter two (Q2).

Utilising the National Institute of Economic and Social Research (NIESR) gross domestic product (GDP) forecast, we can see how the UK output is expected to enjoy a gradual resurgence over the course of Q2, driven primarily by services.

The NIESR expect to see a 4.8% surge in the services sector over the Q2, which is important given that it accounts for 80% of the 80% of the UK economy.

Economic forecasts key on Thursday

One of the more important parts of this forthcoming meeting is the release of fresh economic forecasts from the Monetary Policy Committee (MPC). The successful reopening process and vaccination drive should help bolster expectations of future growth from the group.

On the unemployment front, we are likely to see some job losses when the furlough scheme ends in September. However, it is likely that the peak unemployment rate could be materially lower than previous BoE forecasts.

The other important forecast to watch comes on the inflation front, with consumer price index (CPI) previously projected to settle around 2.1% next year. Of course, the forecast level of inflation will provide some clues as to whether the BoE sees it as something that will need to be addressed in time. The table below highlights the previous projections provided back in February.

What could the MPC do this time around?

We are unlikely to see any shift to the interest rate stance from the MPC at this coming meeting, with markets pricing in just a 0.8% chance that rates will rise on Thursday. Importantly, markets also see just a 5% chance that we will see a rate move at all in 2021.

Perhaps the more interesting area to watch is around the asset purchase scheme, with some looking for the BoE to signal an impending taper of those monthly purchases.

With the banks current rate of gilt purchases meaning that the £875 billion target would be reached prior to the end of the year, there is a chance the bank will trim the rate in the coming months to spread the scheme out across the entire year.

In either case, the total amount of purchases will likely remain the same, with any changes affecting how they are spread across the remainder of 2021.

Where now for the pound?

GBP/USD has been consolidating over the past two months, following a decline out of a reliable five-month uptrend that brought the highest value since April 2018. Despite this period of uncertainty, there is a good chance we see the pound come back into strength before long.

The consolidation looks like a complex inverse head and shoulders formation, with a break up through the $1.4005 handle bringing a bullish confirmation signal. Until then, it is a case of awaiting the breakout from this $1.367-$1.4005 range that has dominated the past two months.