UK: What the Budget means for the BoE? – Nomura

This week’s Budget was big and bold as the Chancellor decided to spend rather than save this year’s better deficit news – in spite of warnings that weaker productivity would damage growth and the fiscal outlook further ahead, explains the research team at Nomura.

Key Quotes

“Revisions saw GDP growth being marked down by an average of 0.4pp in the coming years and, as a result, larger deficits from 2019-20 onwards. Moreover, there were plenty of big-ticket announcements that added to the deficit looking further ahead. The aggregate cost to the Treasury of the measures Mr Hammond announced was some 0.3% of GDP in 2018-19 and 0.5% the following year. Gilt issuance stands broadly unchanged this year but could rise by a total of £60bn in the three years from 2019-20 to 2021-22 thanks to increased spending and slower economic growth.”

“Rates/FX Strategy: MPC to move to a traffic light system?

• Forward guidance is in vogue. It was the main topic addressed by BoE Governor Carney, Fed Chair Yellen, BOJ Governor Kuroda and ECB President Draghi at a conference the other week. But the “masters of Delphic utterances” (as the TSC chair once put it) have been accused in the past of lacking clarity. With the BoE adding to its September statement “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”, it could not have been clearer. But this and “monetary policy could need to be tightened by a somewhat greater extent over the forecast period” were notably missing from the November Inflation Report and led to the Gilt market rally.
• We don’t think this marks the end of forward guidance, but a new start for it with a “traffic light” system similar to that of the ECB’s “vigilance” under Jean-Claude Trichet. What might cause the BoE to make a move would be if it sees inflation falling and/or a potential growth surprise. The first step afterwards would be a notable change in BoE language, with the latest fiscal package impact perhaps playing a part of that.”