Bank Rate held at 0.1% in unanimous vote

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

Related topics:  Finance News
Rozi Jones
5th August 2021
Bank of England BoE

Its latest report shows that, despite the spread of the Delta variant, the impact of Covid on the UK economy will fade further over time.

UK GDP is expected to have risen by 5% in Q2, leaving it around 4% below its pre-pandemic level and slightly stronger than expected in the May Report. After the MPC’s previous meeting, the number of Covid cases continued to rise but has subsequently shown signs of falling back, although there has been a sharp increase in the number of people being asked to self-isolate temporarily.

GDP is expected to grow by around 3% in Q3, somewhat weaker than expected in the May Report, with a small negative impact from recent developments in the pandemic. UK GDP is projected to recover further over the remainder of the year, reaching its pre-pandemic level in Q4 2021, with demand growth boosted by a waning impact from Covid.

Twelve-month CPI inflation rose to 2.5% in June, above the MPC’s 2% target and 0.8 percentage points higher than expected in the May Report. CPI inflation is projected to rise temporarily in the near term, to 4% in Q4, owing largely to developments in energy and other goods prices, before falling back to close to the 2% target.

In recent speeches, MPC members have been split on whether the time is right to raise interest rates.

Last month, MPC member Dave Ramsden, said rising inflation could lead to a tightening of monetary policy, including a potential Bank Rate rise, in the near future.

However another member, Jonathan Haskel, said interest rates should not be raised at this point due to ongoing uncertainty about the future.

In its August meeting, the Committee judged that current elevated global and domestic cost pressures "will prove transitory". However, the economy is projected to experience a more pronounced period of above-target inflation in the near term than previously expected.

It predicts that the economy will have a margin of excess demand for a period. However, in the medium term, inflation is projected to fall back to close to the 2% target, and demand and supply are expected to return broadly to balance.

The MPC has had policy guidance in place specifying that it 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". Some members of the Committee judged that, although considerable progress has been made in achieving the conditions of that guidance, the conditions are not yet met fully.

The other members judged that the conditions of the guidance have been met fully, but noted that the guidance made clear that these have only ever been "necessary not sufficient conditions" for any tightening in monetary policy.

In its minutes, the Committee said it "will not put undue weight on capacity pressures that are frictional in nature and likely to be temporary".

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