LONDON (Reuters) - On Thursday, the Bank of England is expected to refrain from any further stimulus as it waits to see whether a potential no-deal Brexit could worsen the problems already facing the coronavirus-damaged UK economy in two weeks.
London and Brussels are both seeking to escape the Jan. 1 shock of import tariffs on trade, but the BoE looks likely to exit its 895 billion pounds ($1.2 trillion) bond-buying scheme, having ramped it up last month by 150 billion pounds.
That should provide ample firepower until late 2021, and it is expected that the Monetary Policy Committee of the BoE will outline how front-loaded its new bond purchase will be.
At 1200 GMT, the MPC is also likely to retain its benchmark interest rate at a historic low of 0.1 percent.
"We continue to expect that there will be a (Brexit) deal," said JP Morgan economist Allan Monks. "But the MPC's primary focus this week will be any guidance it chooses to offer on how it will respond to a no-deal."
The BoE said last month that it was "ready to take whatever additional measures are necessary to achieve its mandate."
Now with the Brexit deadline approaching and COVID-19 constraints spreading again, it would have to be more clear.
Failure to negotiate a trade agreement will wipe out 2% of economic growth, push up inflation and unemployment, and add 400 billion pounds to public borrowing this year, Britain's budget forecasters warn.
Also with a settlement, the BoE claims that as firms struggle with paperwork, port delays and other consequences of quitting the world's largest single market, the economy will suffer.
The MPC is likely to be reasonably calm about the outlook for now with a Brexit agreement still possible and COVID-19 vaccines being administered.
Unemployment has not risen as sharply as the BoE predicted, and business surveys have indicated that the economy would contract in the fourth quarter by less than its estimate of 2 percent.
The bond-buying program of the BoE is commonly seen as its most likely tool should the stimulus pumps need to be restored.
However, investors are watching Thursday for any new signs about the feasibility of bringing interest rates below zero.
The BoE asked the banks what a transition to negative rates - something already implemented in the euro area and countries like Japan - would mean for them. Representatives of HSBC and Santander on Monday said they were not ready for such a move.