Image source: Rafael Ben-Ari © 123RF.com
The Monetary Policy Committee (MPC) of the Bank of England is meeting this Thursday to deliberate on whether or not the recent developments in the UK and globally necessitate the adjustment of the Bank's monetary policy.
The consensus forecasts do not project any changes to the Bank's interest rate, which is currently at the near-negative 0.10 per cent. However, the MPC might be compelled to adopt a looser and more accommodative monetary policy due to the worsening of the economic situation since the Bank's previous meeting in March.
Back then, the Committee observed that:
" In the United Kingdom, even before the introduction of the most recent social distancing measures, the composite flash output and expectation PMIs fell sharply in March to their all-time lowest levels, consistent with a material contraction in GDP."
Since the last gathering of the MPC, the industrial activity in Britain has sunken to a historic low, and the labour market conditions have deteriorated noticeably. All of these developments would likely prompt the Committee to ramp up its asset-purchasing program in order to support the distorted financial system.
Such actions would be inlined with the recent global developments and actions implemented by other central banks, chiefly that of the European Central Bank.
Consequently, on Thursday the MPC of the BOE is expected to announce it would be increasing either the size or the lengthiness of its asset-purchasing program, which would correspondingly bolster the underlying liquidity in the UK.
Such actions are likely to strengthen the pound in the short term as investors would probably perceive them as being necessary for mitigating the risks to the British economic activity.
At the present rate, looser monetary policies globally are mostly welcomed by investors as tools needed for supporting economic recovery once the healthcare crisis is managed.
In the longer term, however, the more significant money supply circulating in the economy is most likely going to pressure the pound.
GBPUSD 4H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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