"As interest rates remain at historic lows, the reality is that we may see them stay at this level, or even drop to negative as early as next year."
In its latest meeting, the Committee voted 8-1 to increase its bond-buying programme by an additional £100 billion to meet its inflation target in the medium term. This brings the current round of QE to £300bn and the total stock of assets purchased under the program to £745bn.
In its minutes, the MPC said that recent data shows that the fall in global GDP in 2020 Q2 will be less severe than expected at the time of the May Monetary Policy Report. Additionally, there are signs of consumer spending and services output picking up, following the easing of Covid-related restrictions on economic activity.
However the Committee noted that "downside risks to the global outlook remain", including from the spread of Covid-19 within emerging market economies and from a return to a higher rate of infection in advanced economies.
The MPC said: "The unprecedented situation means that the outlook for the UK and global economies is unusually uncertain. It 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 Monetary Policy Committee held an emergency meeting on 19th March and unanimously voted to cut the rate to a historic low of 0.1%.
The shock Bank Rate cut came just eight days after it made an emergency rate cut to 0.25% in response to the economic pressure of the coronavirus outbreak.
Rachel Winter, associate investment director at Killik & Co, commented: “As interest rates remain at historic lows, the reality is that we may see them stay at this level, or even drop to negative as early as next year. The prospect of negative rates has only recently been floated by the central bank due to the UK-wide lockdown having had a far greater hit on the economy than predicted, with a 20.4 per cent contraction in April – another record. For now, the fresh round of QE will provide another cash injection; perhaps biding time until we can start to see the effect of lockdown restrictions easing.
“As non-essential businesses have now been allowed to re-open, and assuming that social distancing measures will be further relaxed over the coming months, we could see sectors such as retail rebound quicker than others. The next few months are crucial, but the Bank may need to take bold action if the economic nosedive does not start to change direction, limiting the longevity of any recession. This isn’t only a consideration for the UK: global rates are expected to remain low and the Fed has already confirmed it will not raise rates until 2023.”
Frances Haque, chief economist at Santander UK, said: “The MPC’s decision to leave Bank Rate unchanged at 0.1% was expected this month, along with the decision to increase the amount of Quantitative Easing undertaken by the Bank of England.
“Although comments have been made in recent weeks by MPC members on the possible move to negative interest rates, making it clear that this is currently under review, any move will need to be accompanied by additional forward guidance.
“However, given the current state of the UK economy and how it will be able to recover from the restrictions of lockdown, there continues to be a significant possibility of further rate cuts as we move through the rest of 2020, if the economic data remains bleak.”
Hinesh Patel, portfolio manager at Quilter Investors, added: “Given the immediate market reaction it appears investors were hoping for a little more than the £100bn increase in quantitative easing that has been announced by the Bank of England. Indeed they may have a point in being disappointed by this announcement given the Federal Reserve and European Central Bank are both guiding the market that they will do whatever it takes to keep the economy afloat.
“But this move is understandable from the Bank of England. It is important these sort of policies move at a steady pace, and with economic data not as severe as previously expected the Bank has given itself some headroom should unemployment turn structural. This decision will quash the notion of a negative policy rate in the UK that has seen much speculation. However, should things go even worse from here, they have left themselves enough bond purchasing capacity in the future to continue soothing markets and the economy as best they can.”
