HSBC says Bank of England to 'Taper' in May

- BoE to start easing monetary support
- HSBC look for 'gradual tapering'
- Join NatWest in predicting such a move

Image © Bank of England

HSBC have become the latest UK lender to predict the Bank of England will begin the process of tightening UK monetary conditions at its May policy meeting, a move that could continue to underpin valuations in the British Pound.

Economists at HSBC tell clients in a new research note that the Bank of England (BoE) will announce it is to start tapering its quantitative easing programme, by cutting the pace it acquires bonds from the open market.

"The May meeting could well be the time the MPC starts a gradual tapering of asset purchases," says Elizabeth Martins, Senior Economist at HSBC.

HSBC expect the BoE might announce a reduced purchase pace for its quantitative easing programme, while raising its growth forecasts and nudging down its near-term inflation forecast.

Above: The markets are now pricing in a 15bp rate rise by the end of next year, and more than 50bps of tightening over the next three years. Image courtesy of HSBC.

The BoE's May 06 Monetary Policy Report will be accompanied by a market notice setting out the intended pace of purchases of bonds from the week commencing May 08 until its June 24 meeting.

Since August 2020, it has been buying £1.48BN worth of bonds at three weekly auctions as part of its quantitative easing programme.

This makes for a total of £4.4BN a week in purchases.

HSBC says this should take its holdings of gilts to £798BN by the time of the May meeting – about £77BN below its £875BN target.

The BoE has said it intends to reach this target by the end of 2021.

As well as another £77BN of net purchases, HSBC says there are another £33BN in reinvestments that the BoE needs to make before end-year.

They estimate this works out as £110BN of gross purchases over 34 weeks – or £3.2BN a week.

"So, even if it announces a taper on 6 May, the step downwards is unlikely to be too drastic," says Martins.

Image courtesy of HSBC.

Debate regarding BoE policy is now increasingly one of when and how it will exit quantitative easing ahead of raising interest rates again, highlighting just how far the policy debate has progressed in a mere four months.

At the start of the year the debate amongst economists was one centred on whether or not the BoE would cut interest rates to negative in order to boost stimulus, now it is about scaling back stimulus.

The BoE's shift from a 'dovish' central bank to one that is more 'hawkish' has been credited by foreign exchange analysts as one reason why Sterling has found support over the duration of 2021.

Daragh Maher, Head of Research, U.S., at HSBC says this shift in expectations "justifies the strong performance of GBP for much of 2021 so far".

We reported earlier this week that economists at NatWest Markets are telling their clients that the BoE is likely to announce a tapering at its May 06 meeting.

"While the Bank of Canada kicked off taper season, I expect the Bank of England in May will turn investor attention more fully on the issue," says John Briggs, Global Head of Strategy at NatWest Markets.

Briggs says in a weekly client research briefing he expects the BoE in May will announce a reduction in Quantitative Easing from ~£18BN a month to ~£14BN a month.

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Theo Chapsalis, Head of UK Rates Strategy at NatWest Markets in London, says the BoE is likely to deliver a technical tapering of buybacks thanks in part to a healthy economic recovery and stronger macroeconomic data.

A sweathe of survey data has of late shown the UK economy to be undergoing a rebound following the easing of restrictions in recent weeks, and economists expect the pace of recovery will accelerate as further easing is allowed in May and June.

The UK government's Debt Management Office has for its part signalled a 14.6% reduction in gross gilt issuance as government demand for borrowed money eases; "definitely significant both in absolute terms and relative to previous years," says Chapsalis.

The strong economic recovery and expectations for tapering has NatWest Markets forecasting +1.0% yields on ten-year gilds on the horizon.

Should the UK's gilt yields start rising faster than those in other countries, the Pound could stand to benefit on a relative basis.