Economic Situation Not as Bad as in Spring 2020 for BOE’s Bailey - Forex News by FX Leaders

Economic Situation Not as Bad as in Spring 2020 for BOE’s Bailey

Posted Tuesday, January 12, 2021 by
Skerdian Meta • 2 min read

The economy of Britain went through a massive crash in Q2 of last year, during the first phase of the coronavirus lockdowns. As a result, the Bank of England panicked and introduced some of the biggest monetary stimulus programs we have seen in the UK, on top of the fiscal programs from the UK government.

Now, the country is under new lockdown rules, but the BOE doesn’t consider the situation to be as bad it was a year ago, and the GBP/USD has bounced around 150 pips higher. This suggests that once the restrictions are over, the GBP is likely to enter a bullish trend, since the Brexit trade deal was finally reached at the end of December, as everyone was anticipating, despite all the games from both sides.

Comments by BOE governor, Andrew Bailey

  • Impact of latest virus restrictions appears less than that in spring last year
  • It feels a bit like the darkest hour before the dawn
  • Too soon to reach any conclusion about the need for future stimulus
  • Our best guess is GDP over Q4 was flat to slightly down
  • We have very little evidence of scale of economic impact of latest lockdown
  • Mobility indicators are down more than in autumn, but less than in spring
  • Expects Q1 output to be weaker than November forecasts
A couple of trivial remarks so far by Bailey. However, it does allude to some hints that the BOE acknowledges that economic conditions are slowing, but not quite to the point that it is going to force their hand to ease further in the immediate future.

Further Comments 

  • There are a lot of issues with negative rates
  • No country has used negative rates in the ‘retail’ end of the financial market
  • Transmission of negative rates depends on the banking system
  • The BOE is doing a lot of work on whether negative rates are practical
  • There are good reasons to think we’re in a world of low interest rates for a long time
  • Outlook for interest rates hinges on productivity growth

I wouldn’t read too much into his remarks on negative rates for the time being, as they will change according to how the central bank sees fit to adjust their narration. If the economy does much worse in the coming months, negative rates will suddenly prove to be “effective” since they might actually start examining it. Otherwise, they’ll try to skirt around the topic and keep it “in the middle” as above.


Remarks by BOE policymaker, Ben Broadbent

  • Pandemic has depressed inflation by a bit less than anticipated
  • Consequences on consumption in terms of cost pressures are probably limited
  • Expect unemployment to rise once furlough scheme is wound down
  • Unemployment will be the best measure of a slacking economy
The headline remark is interesting, but unless inflation is on a sustainable recovery path, it still wouldn’t do the BOE much good to consider a change from its current policy stance.
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