MARCH 16, 2021

THE U.K. ECONOMIC MONITOR SAMUEL TOMBS, CHIEF U.K. ECONOMIST

Markets expect Bank Rate to rise to 0.25% in Q1 ECONOMIC DATA HAVE CONTINUED TO SURPRISE TO THE UPSIDE

2023, 18 months earlier than when the MPC last met. Economic Surprise Indicies, Z-Score, U.K.
Eurozone
U.S. 1.5
The Governor believes such a re-pricing is largely * Data relative to Bloomberg consensus, over last
6m., with more weight given the recent releases 1.0
warranted by positive vaccine and economic news.
0.5
Financial conditions remain very loose, thanks to a
0.0
further rise in equity prices and lower mortgage rates.
-0.5

The MPC won't Lean Against the Rise 18 19 20 21

-1.0

in Rate Expectations at this Stage

The big question for investors ahead of Thursday’s
MPC meeting is whether the Committee will push back
against the recent rise in interest rate expectations
in the minutes. When the MPC last met on February
4, the overnight index swap rate curve was slightly
downward sloping until mid-2022. But investors now
see a 50% chance that Bank Rate will rise to 0.25%,
from 0.10%, by September 2022. A 15bp hike is fully
priced-in by January 2023, with a further 25bp rise to
0.50% fully anticipated by the end of that year.
We think the Committee will note the rise in
rate expectations, but will not seek to flatten the
curve. Markets have rightly responded to the run of
better-than-expected news on the economy’s current
performance. In particular, the 2.9% month-to-month
fall in GDP in January was much smaller than the 4.9%
drop anticipated by the consensus. We now expect
GDP to drop by a mere 1.6% quarter-on-quarter in
Q1, far less than the 4.1% fall forecast by the BoE in
February’s Monetary Policy Report.
The rollout of vaccines also has gathered pace
since the MPC last met, setting the stage for a solid
and sustainable economic rebound in the summer.
The Chancellor also helped to reinforce this recovery
in the Budget by rolling forward all the measures
currently supporting the economy until the end of Q3.
The total giveaway in the upcoming 2021/22 fiscal
year amounted to £59B, equal to about 3% of GDP.
As a result, Governor Bailey stated on BBC Radio 4
on Monday that the BoE now expects GDP to return to

THE FIRST RISE IN BANK RATE NOW IS FULLY PRICED IN BY Q1 2023 NEAR-TERM FISCAL SUPPORT IN THE BUDGET WAS SUBSTANTIAL

Instantaneous OIS forward curve, March 12 Changes to borrowing forecast since November 2020, £B
February 4 Indirect effects
Underlying forecast changes
1.00 Policy changes
Feb. 25 Change in borrowing 80
0.75
Dec. 23 60

40
0.50
Jan. 23 20
0.25 0

-20
0.00
-40
-0.25 -60
Jan 21 Jan 22 Jan 23 Jan 24 Jan 25 Jan 26 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26

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THE U.K. ECONOMIC MONITOR
THE MPC HAS TOLERATED MUCH STEEPER RATE CURVES BEFORE
Difference between 3yr OIS rate and SONIA, day before MPC meeting, bp
The MPC is
not going to
react to this
12 13 14 15 16 17 18 19 20 21
its Q4 2019 peak in Q4 2021, one quarter earlier than
it forecast last month. He also stated that the increase
in interest rates over the six weeks was, in his view,
"consistent with the change in the economic outlook."
Even if some of the more dovish members of the
MPC do not agree with the Governor, the amount of
tightening anticipated by investors over the next three
years still is relatively modest by past standards, as
our chart above shows. Investors see little chance
of Bank Rate rising in the next year, which is the
horizon over which the MPC can make believable
commitments. Any commitment to keep Bank Rate
on hold beyond a year, or to tighten policy less quickly
than markets expect over the medium term, would
lack credibility, given that upside scenarios for the
economy—such as households aggressively spending
down their savings—cannot be dismissed.
Meanwhile, the impact on monetary and financial
conditions of higher rate expectations and sterling's
recent appreciation has been countered by a further
small recovery in U.K. equity prices and by a decline
in mortgage rates. Recently, the BoE has begun
to include mortgage spreads in its bespoke U.K.
Monetary and Financial Conditions Index. The MPC
likely, therefore, will judge that overall financial
conditions remain sufficiently loose.
Note too that the MPC still has not decided how
it will tighten policy, when the time comes. Last
month, it instructed Bank staff “…to commence work to
reconsider the previous guidance on the appropriate
strategy for tightening monetary policy should that be
required in the future”. The previous guidance, from
June 2018, stated the MPC would maintain the size
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MARCH 16, 2021
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WILL THE MPC REDUCE ITS WEEKLY ASSET PURCHASES? NOT YET
Weekly BoE purchases of gilts, excluding reinvestments, £B (Left)
Total stock of gilt purchases, £B (Right)
100 Purchases authorised, £B (Right)
Stock if current weekly purchase pace is maintained (£4.0B pw) (Right)
75 Path to meet stock target at the end of this year (£2.7B pw) (Right)
30 900
850
50 25 800
750
25 20
700
15 650
0 600
10 550
-25 500
5
450
-50 0 400
Mar 20 Jun 20 Sep 20 Dec 20 Mar 21 Jun 21 Sep 21 Dec 21
of the APF at least until Bank Rate had risen to about
1.5%, but the Governor is pushing for the Committee
to switch to committing to sell down its QE holdings
first, before hiking Bank Rate. The MPC did not set
Bank staff a deadline for this review, but it is unlikely
that it will have been completed by this week. Even if it
wanted to, therefore, the MPC is not in a position to be
talking down market rates, though a reminder that it
is considering selling assets before raising Bank Rate
might bear down on rate expectations a little.
Meanwhile, we doubt the MPC will slow its weekly
gilt purchases from the current £4.0B rate this week.
It will need to shift down a gear eventually, if it wants
to hit its £875B target for the APF no earlier than
the end of this year. But we think it is more likely to
slow its purchases in the summer, when the economy
has rebounded. Alternatively, it might maintain the
current purchase rate and hit its target at the end of
September. This would make some sense, as it would
coincide with a decline in gilt issuance as Covid-
related support measures end.
All told, our view remains that the MPC will keep
Bank Rate on hold this year and in 2022. Thereafter,
we expect it to tighten policy first by reducing the
APF from early 2023, before raising Bank Rate to
0.25% at the end of that year. Signs, however, that
the economy will rebound over the summer have
convinced us that the MPC will maintain its end-
year target for gilt purchases at £875B, rather than
increase it by £50B, as we had previously expected.
Samuel Tombs +44 (0)203 744 7430
samuel@pantheonmacro.com
THE U.K. ECONOMIC MONITOR
Summary of MPC members' views
MPC member
Andrew Bailey
(Governor)
Ben Broadbent
(Deputy Governor,
Monetary Policy)
Jon Cunliffe
(Deputy Governor,
Financial Stability)
David Ramsden
(Deputy Governor,
Markets & Banking)
Andrew Haldane
(Chief Economist)
Jonathan Haskel
(External Member)
Michael Saunders
(External Member)
Silvana Tenreyro
(External Member)
Gertjan Vlieghe
(External Member)
* Term could be extended
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Term Last vote Past non-consensus votes Latest key comment
end
Mar. BR = 0.10% None. “We have seen some increase in interest rates over the
2028 QE target = last month or so, as have other countries. My assessment
£895B so far is that is consistent with the change in the economic
outlook.” Interview on BBC Radio 4, March 15.
Jun. BR = 0.10% Voted against increasing "It would take significant news” to alter the pace of
2023* QE target = QE by £50B in July 2012. QE purchases. Testimony to the Treasury Committee,
£895B February 24.
Oct. BR = 0.10% Voted against raising "Looking to the future, we may want to revisit the balance
2023* QE target = interest rates in November between the various capital buffers, with a view to having
£895B 2017. more in countercyclical buffers that are releasable by
regulators, and less in the fixed buffers." Comments at
online event, October 15.
Sep. BR = 0.10% Voted against raising "It remains appropriate for policy to lean strongly against
2022* QE target = interest rates in November downside risks to the outlook" Speech in Birmingham,
£895B 2017. February 17.
Jun. BR = 0.10% Voted to raise Bank Rate "For me, there is a tangible risk inflation proves more
2023* QE target = in June 2018. Voted not to difficult to tame, requiring monetary policy makers to act
£895B extend QE in June 2020. more assertively than is currently priced into financial
markets." Speech in online webinar, February 26.
Aug. BR = 0.10% Voted to cut rates three “Given the endogenous nature of supply and the
2021* QE target = times between November temporary factors underpinning that movement into
£895B 2019 and January 2020 and excess demand, namely fiscal spending on health
to extend QE in May 2020. and some pent-up demand, I see relatively little risk of
sustained above-target inflation over this period.” Speech
in online webinar, March 5.
Aug. BR = 0.10% Voted to raise rates by 25bp "I will continue to put high weight on labour market data
2022 QE target = three times in 2017, and in judging whether spare capacity in the economy has
£895B three times in 2018. Voted been used up, and hence whether we are on track to
to cut rates three times return inflation sustainably to target in line with our remit."
between November 2019 Speech in online webinar, February 18.
and January 2020. Voted to
extend QE in May 2020.
Jul. BR = 0.10% None. “The MPC has given guidance that policy will not be
2023 QE target = tightened before there is clear evidence that significant
£895B progress is being made in eliminating spare capacity and
achieving the inflation target sustainably. It is possible
that more stimulus be needed to do so at an appropriate
pace. If that is the case, having negative rates in our
toolbox will, in my view, be important.” Speech in online
webinar, December 4.
Aug. BR = 0.10% Voted to cut interest rates Should market functioning deteriorate again, of course the
2021 QE target = by 25bp in July 2016. MPC will not hesitate to accelerate the buying pace again,
£895B if that is appropriate. Absent such a deterioration, and
with long-term interest rates already very low, we need to
look for tools other than QE to deliver further stimulus if
required.” Speech in online webinar, February 19.
THE U.K. ECONOMIC MONITOR MARCH 16, 2021
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THIS WEEK IN BRIEF

Note: “D” prefix denotes Datanotes for these releases. CHART OF THE WEEK: THE ONLY WAY IS UP FROM HERE

Monday, March 15 GDP, m/m% (Left)

Level, Jan. 2020 = 100 (Right)
• No significant data released. PM forecast
10 100
8
Tuesday, March 16 6 95
• No significant data released. 4
2 90
Wednesday, March 17 0
-2 85
• No significant data released. -4
Q1 2020: -1.6% q/q
Q2: 5.0% q/q
-6 80
Thursday, March 18 Q3: 2.0% q/q
-8 -18.3% Q4: 1.0% q/q
• D: MPC Meeting (1)/12:00 GMT -10 75
Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21
We anticipate another unanimous vote to keep Bank Rate
at 0.10% and the end-year target for holdings of gilts and
corporate bonds at £875B and £20B, respectively. Since
the MPC's last meeting at the start of February, the news
has been positive, with vaccines rolled out quickly and
GDP on course to fall by less than 2% in Q1, much better
PANTHEON’S FINANCIAL FORECASTS
than the 4.2% decline anticipated by the BoE's staff. The
Chancellor also announced in the Budget a net giveaway of End-month:
£59B in the 2021/22 fiscal year. Nonetheless, it is far too 5pm Mon. M
ar 21 Jun 21 Sep 21 Dec 21 Dec 22
soon to expect the Committee to provide more colour on Bank Rate 0.10 0.10 0.10 0.10 0.10 0.10
the likely extent and timing of any future interest rate rises. 3m Libor 0.08 0.05 0.10 0.10 0.10 0.20
Meanwhile, the recent increase in interest rate expectations
12m Libor 0.15 0.10 0.15 0.15 0.15 0.30
and gilt yields has been neither disorderly or sufficiently
large to threaten the viability of the recovery. As a result, 2-year Gilt 0.10 0.05 0.05 0.10 0.10 0.20
we do not expect the Committee to jawbone markets' rate 10-year Gilt 0.80 0.60 0.60 0.65 0.70 0.80
expectations lower or to accelerate the pace of its asset 30-year Gilt 1.33 1.20 1.20 1.20 1.30 1.40
purchases. Consensus: Bank Rate 0.10%, gilts £875B,
FTSE 100 6749 6600 6800 6900 7200 7500
corporate bonds £20B.
USD/GBP 1.39 1.38 1.35 1.35 1.35 1.35
Friday, March 19 EUR/GBP 1.16 1.14 1.12 1.12 1.12 1.12
• GfK Consumer Confidence Survey (3)/00:01 GMT
The continued decline in the spread of Covid-19, the rapid
rollout of vaccines, and the rolling forward of near-term
fiscal support in the Budget all suggest that consumers'
confidence likely recovered further in March. As a result, we
expect the composite index to rise to about -20, from -23 in
February. Consensus: -20. PANTHEON’S ECONOMIC FORECASTS

• D: Public Finances (2)/07:00 GMT Period average:

We look for borrowing on the PSNB ex. measure of about
£20.0B in February. Expenditure likely remained very
high, due to huge outlays for the Test and Trace system
and the furlough scheme. But tax receipts likely have held
up relatively well, given signs that GDP will be higher in Q1
than the OBR expected. As a result, our forecast is a bit
below the likely level required for full-year borrowing to hit
the OBR's £354.6B forecast. Note that the OBR's projection
includes an estimate of the write-offs that eventually will
be incurred on the crisis loans given to businesses. Until
now, the ONS has not incorporated these likely write-
offs in its borrowing numbers, though it might update its
methodology this month. Consensus: £21.4B.
Q1 21 Q2 21 Q3 21 Q4 21 2020 2021 2022
GDP, q/q% -1.6 5.0 2.0 1.0 - - -
GDP, y/y% -6.6 21.2 6.4 6.4 -9.9 6.2 4.5
Employment, y/y% -1.9 -0.8 -0.4 -0.3 -0.5 -0.9 0.7
Unemp. rate, % 5.2 5.3 5.5 5.8 4.5 5.4 5.3
Wkly earnings, y/y% 5.4 8.7 4.3 2.6 1.8 5.5 2.0
CPI, y/y% 0.9 1.9 1.8 2.3 0.9 1.7 1.8
RPI, y/y% 1.7 2.9 2.7 3.0 1.5 2.6 2.6
PSNB FY, % GDP - - - - 17.0 10.0 5.0
Cur. acc’t., % GDP -2.8 -3.0 -3.2 -3.4 -2.5 -3.5 -4.0
House prices, y/y% 7.8 8.1 6.3 1.9 3.3 6.0 0.0

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