The Bank of England sets UK interest rates at midday today, amid an economic recovery as the country slowly emerges from lockdown and more people are vaccinated.
Private sector growth has been the fastest in years, mortgages are at an all-time high, and economists forecast the biggest GDP rebound since the 1940s.
Investors are also optimistic. the FTSE 100 The stock index hit its highest level in more than a year yesterday, with mining giants, oil companies and banks among the increases – all companies benefiting from a global rebound.
As the economic situation improves, the BoE is expected to raise its growth forecast today, in its latest monetary policy report (also released at noon).
Elsa Lignos from RBC predicts that the Bank will forecast a smaller peak in unemployment this year:
Significantly, the extension of the government’s leave program, which was announced in the budget, is likely to see the MPC lower its estimate of where it expects unemployment to peak once. support withdrawn.
This optimism should certainly not trigger an increase in interest rates from their current record low of 0.1%.
But the Monetary Policy Committee will wonder when it should slow down or scale back its £ 895bn asset-buying stimulus package, which buys around £ 4.4bn in government bonds every week.
Any belligerent signal about this could also push the pound higher (it is currently trading at $ 1.39).
Shamik dhar, chief economist at BNY Mellon Investment Management, says the outlook for the UK economy “looks bright”.
Thanks to an impressive vaccine rollout, the economy is expected to rebound strongly in the second half of the year, likely at double-digit annualized growth rates, bringing overall activity back to pre-crisis levels this year. Inflationary pressures could intensify, but will likely be contained by a strong supply response in industries that have been stranded. The Bank of England (BoE) is still a long way from tightening monetary policy, but could be one of the first central banks to report that it is considering it, possibly in early 2022.
That said, the BoE is considering changing the traditional sequencing of political tightening, with policy rate hikes possibly before a balance sheet reduction, and is expected to provide guidance on this at future policy meetings. We expect that much of the budget deficit will correct itself automatically as private sector economic activity picks up sharply, but the Chancellor may need to raise taxes slightly further from here. Over the longer term, the public debt burden will decrease as long as the performance of the gilts remains below the nominal growth rate of the economy.
But the economy will not return to its pre-Covid state, of course, Dhar adds:
“The economy will quickly return to pre-crisis levels of economic activity and possibly return to pre-crisis trend levels next year. But the makeup of the UK economy has likely changed permanently thanks to the pandemic. While we will see a strong rebound in sectors “in close contact”, such as hospitality and travel, this year and next, they may never recoup their share of the pre-crisis economy. Goods and services “consumed at a distance” will remain a larger proportion of the economy than they were before the pandemic.
European stocks should open a little higher, with new eurozone construction data, the final UK services PMI for April and the weekly US unemployment report coming up as well.
- 7am BST: German factory orders for March
- 8:30 am BST: Eurozone construction PMI for April
- 9:30 a.m. BST: UK services PMI for April
- Noon BST: Bank of England decision on interest rates
- Noon BST: Bank of England publishes monetary policy report
- 1:30 p.m. BST: US weekly jobless claims figures