"GDP is expected to fall by around 4% in Q1 2021, in contrast to expectations of a rise in the Committee's November Report."
In the Committee's meeting, it noted that Covid-19 vaccination programmes are under way, which has improved the economic outlook. Nevertheless, it said recent UK and global activity has been affected by an increase in Covid cases, including from newly identified strains of the virus, and the associated reimposition of restrictions.
GDP growth slowed in Q4 2020, as a rise in Covid cases and consequent restrictions to contain the spread of the virus weighed on economic activity.
The impact on the economy is not expected to be as severe as in Q2 2020, during the UK’s first lockdown. GDP is expected to fall by around 4% in Q1 2021, in contrast to expectations of a rise in the Committee's November Report.
UK GDP is expected to have risen a little in Q4 to a level around 8% lower than in Q4 2019, materially stronger than expected in the November Report.
GDP is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination programme is assumed to lead to an easing of Covid-related restrictions and people’s health concerns.
In the MPC’s central projection, conditioned on the market path for interest rates, CPI inflation is projected to be close to 2% over the second and third years of the forecast period.
In its minutes, the MPC said: "If the outlook for inflation weakens, the Committee stands ready to take whatever additional 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."
Hinesh Patel, portfolio manager at Quilter Investors, commented: “While the market pricing for negative interest rates has persisted for some time, today the Bank of England has quashed the idea of rates going sub-zero, at least for now. We would have to see significant economic weakening in the UK for them to become a reality, and with inflation expected to tick up as the year goes on, the BoE can’t afford to sink sterling as we get back into recovery mode.
“Importantly, the BoE will be watching the unemployment rate closely, particularly given we should begin to see the roadmap emerging for how the furlough scheme and business rates exemptions get withdrawn. The unemployment rate without furlough will be running well above 10%, and this could easily go higher, so the Bank needs weapons in its arsenal if it is to continue tackling this crisis.
“That said, there are reasons to be optimistic as a UK investor. With the hugely successful vaccination drive and supply issues being overcome, it’s not unrealistic to believe the second half of the year will produce the return of consumer confidence. With recent economic data also beating estimates of late, it could be that we are past the point of peak pessimism.”
Luke Bartholomew, senior economist at Aberdeen Standard Investments, added: “No surprises today from the Bank of England, at least in terms of its interest rate decision. What is perhaps more interesting is that the decision was unanimous, with no participants voting for a cut to negative interest rates despite several expressing their attraction to the policy. This is unlikely to be the end of that debate, with the Bank releasing feedback from various stakeholders today along with their previous analysis. However, the chance of a cut to negative rates at least in the near term has probably decreased somewhat, as the Bank watches to see how vaccine roll out progresses and how the economy eventually recovers from the Covid shock.”
