As expected, interest rates have been kept the same following the Bank of England’s Monetary Policy Committee meeting this week - but that’s not the main story. The economic performance in Q1, outlook for Q2 and vote on whether to implement further quantitative easing, and what we can infer from these points, is what could really impact your trading. So, to help you not get caught out, here are 4 key takeaways from this morning’s announcement.
1. UK is heading for recession
Unsurprisingly, the economy contracted in Q1. Despite the chaos, though, it only actually shrunk by 3%, as businesses were for the most part entirely operational for the first two months of the year. Q2, on the other hand, is a whole different story. The BoE reported that it expects the economy to shrink an unprecedented 25% in April, May and June, even if lockdown measures are eased this week as expected.
Two consecutive quarters of negative growth will mean falling into a recession, and that’s a certainty now given the outlook for the rest of the quarter. Despite it being predictable, sentiment will still likely suffer when it officially hits, which is something to note for your own trades when the BoE’s next Monetary Policy Meeting (MPC) occurs.
2. The economy will likely struggle throughout 2020
The BoE also reported that spending was down in recent weeks by 30%. This can obviously be directly linked to the enforced lockdown measures, but that’s not to say once lifted the UK economy is out of the fire. Rather, the fire is going to be blazing on for a while, as the BoE and the government desperately try to reduce it to embers.
This is because consumer confidence is still going to be desperately low. We’re all aware that lockdown measures could be reinforced in a few months if, as some expect, a fresh spike of Coronavirus cases arise. Not only that, but certain markets such as the housing and aviation industries have been completely crippled by this pandemic, so it’s going to take a lot more than just the passing of days and a lift in lockdown restrictions to get back to economic health.
3. QE may be an option
Two of the MPC’s nine members voted for a fresh round of quantitative easing (QE) in today’s meeting. That’s not to say it was a close vote, but rather it indicates that some intent was there to introduce further QE stimulus to the economy.
With interest rates all but locked in at a record low of 0.1%, the chances of rates staying at that level today pre-meeting were put at 99%. That leaves QE as the only realistic, easily applicable measure to implement that will help the economy. Given that Q2 is predicted to be far worse than Q1 and that there’s optimism that the end of lockdown will at least ease the economic downturn (for Q3), perhaps the bank is waiting until next month’s meeting to play their QE hand.
4. UK markets haven’t suffered
Despite the fairly horrendous outlook for the UK economy, talks of the worst recession in history and consumer confidence at rock bottom, UK markets actually rose on Friday morning.
GBPUSD was up nearly 1% as it reached 1.242, while the FTSE rose to a weekly high of 5930. The pound has since fallen back down at the time of writing, but the FTSE remains on course to secure the gains and could even finish the day over 6000.
The rises may have been a result of a number of things. The lack of QE stimulus measures added might mean investors interpret that the MPC don’t see this contraction of the economy to be as bad as expected - yet as established, the MPC is likely waiting for harder times to come. Alternatively, the 3% contraction in Q1 might not have been as severe as many anticipated it would be. Whatever the reason, these two markets should be closely followed in the coming days, as we find out exactly what a loosening of lockdown restrictions means to the public and the wider economy.