Bank of England's MPC holds interest rates at 0.1%

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

Related topics:  Finance News
Rozi Jones
6th May 2021
Bank of England BoE
"The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity"

The Committee judged that GDP growth slowed in Q1 as Covid-related restrictions continued to weigh on economic activity, although it said growth appears to have been stronger than predicted in its February report.

UK GDP is expected to have fallen by around 1.5% in 2021 Q1, less weak than was assumed in the February Report, and is expected to rise sharply in Q2 as restrictions on economic activity ease.

Despite this, activity in the quarter is likely to remain around 5% below Q4 2019 levels.

Although there is a decline in health risks going forward, the Committee said that the outlook for the economy "remains uncertain". In its report, the MPC said that the economic outlook "continues to depend on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments".

In the central projections of the MPC’s May Report, the economy experiences a temporary period of strong GDP growth and a temporary period of modestly above-target CPI inflation, after which growth and inflation fall back, with inflation around the target two and three years ahead.

Twelve-month CPI inflation rose from 0.4% in February to 0.7% in March. The MPC predicts that CPI inflation will rise temporarily above the 2% target towards the end of 2021, owing mainly to developments in energy prices. However it says these transitory developments "should have few direct implications for inflation over the medium term".

In its report, the MPC concluded: "In judging the appropriate stance of monetary policy, the Committee will, consistent with its policy guidance and as always, focus on the medium-term prospects for inflation, including the balance between demand and supply, rather than factors that are likely to be transient.

"The MPC will continue to monitor the situation closely and will take whatever action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably."

Paul Craig, portfolio manager at Quilter Investors, commented: “The Bank of England remains super cautious with its monetary policy but for how long this can be sustained remains to be seen. It has done a stellar job in supporting the economy and financial markets through challenging waters, but consumers and investors must be prepared for the beginning of a tapering programme to reduce the scale of quantitative easing in-line with the vaccination roll-out and the economic reopening.

“Given we are just over a month away from the government declaring life ‘back to normal’ we should not be surprised to see the BoE eventually have to act later in the year to counteract any of the effects of this economic awakening. We think it is unlikely the UK will see long-term sustained inflation given potential growth is still down from where it was at the turn of the millennium and the economic scarring is still unknown at this stage. So while we welcome the upgrade in growth forecasts, they may only force the Bank’s hand if they can be truly sustained.

“This is where fiscal policy and private enterprise should now take over the reins to get the jobs market back to full steam. Well-run businesses now have a great opportunity to bounce back ahead of them with pent up demand being released. Many of these companies have shown great resilience getting through Covid and we expect those in the mid cap space to see strong demand and growth over the next six to twelve months.

“But just as one risk begins to subside, others pop up and cause their own kind of headaches. The elections in Scotland and Wales, as well as the ongoing kinks being ironed out in the Brexit treaty, will be closely watched by the BoE. Should we move one step closer to the break-up of the Union, it may need to think about using that policy arsenal once more to calm any nerves around borrowing costs, sterling and the economy.”

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