Finance News

Bank of England holds interest rates at 0.1%

The MPC said the outlook and the future path for monetary policy will depend "critically on the evolution of the pandemic".

Rozi Jones
|
6th August 2020
bank of england boe

The Bank of England's Monetary Policy Committee has voted unanimously to maintain Bank Rate at 0.1%.

At it's meeting on the 4th of August, the Committee said that the outlook for the UK and global economies "remains unusually uncertain".

The MPC said the economic outlook and the future path for monetary policy will depend "critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors".

The Committee says it "does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably".

The MPC’s projections assume that the direct impact of Covid-19 on the economy dissipates gradually, but in its announcement added that given the inherent uncertainties regarding the evolution of the pandemic, its medium-term projections are "a less informative guide than usual".

In the MPC’s central projection, GDP continues to recover as social distancing eases and consumer spending picks up further. Business investment also recovers, but somewhat more slowly, and nemployment declines gradually from the beginning of 2021 onwards.

However, GDP is not projected to exceed its level in Q4 2019 until the end of 2021. The MPC’s central projection implies that a margin of spare capacity is likely to remain until the end of next year and says risks to the outlook for GDP are "judged to be skewed to the downside".

Twelve-month CPI inflation increased to 0.6% in June from 0.5% in May. CPI inflation is expected to fall further below the 2% target and average around 0.25% in the latter part of the year, largely reflecting the direct and indirect effects of Covid-19. In the MPC’s central projection, conditioned on prevailing market yields, CPI inflation is expected to be around 2% in two years’ time.

Richard Pearson, director at investment platform, EQi, commented: “Negative interest rates really are a last resort, so the smart money was against the Bank of England actually bringing them in this morning. But that doesn’t mean it won’t happen down the line.

“While borrowers on variable rates might have benefited, it is still unclear what impact negative rates would have on the economy. For now though, investors will take heart from the fact that the Bank now expects the drop in GDP this year to be less than initially feared.

“Rates are still at record lows and future moves to negative territory are yet to be ruled out by the governor. For those stuck on low savings rates it is yet another signal that the stock market could be a better alternative for their money.”

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