Sterling initially rallied after this morning’s Bank of England policy meeting but has since given back most of its gains. The GBP/USD cross is back to its pre-meeting level of 1.313 at time of writing although GBP/EUR has only given back half of its gains to trade just below 1.11. The Monetary Policy Council left its policy rate unchanged at a record-low 0.1% and its QE program unchanged at £475bn at its meeting on Thursday, in line with expectations. More interesting were its revised quarterly forecasts.
The Bank of England said that the initial hit from the national lockdown was not as severe as it had projected in May but that’s not saying much given its initial apocalyptic forecasts. Indeed it forecast that GDP in Q2 was more than 20% lower than in Q4 2019 which if correct would imply that UK economy shrank by more in H1 2020 than any other major economy bar Spain. Importantly, the Bank of England forecast that GDP growth would slow dramatically after Q3, that the GDP level at end-2020 would still be 5% below its pre-pandemic peak and would only reach its pre-covid peak at the end of 2021.