The Bank of England kept monetary policy unchanged on Thursday, citing an “unusually uncertain” outlook for the UK economy because of the spread of coronavirus, the Brexit situation and public attitudes to both.
Facing difficulties in assessing whether the economic prospects had improved or deteriorated, the bank’s Monetary Policy Committee decided to leave interest rates at 0.1 per cent and the target for its asset purchasing programme at £895bn by the end of 2021.
It made no comment on its review of the feasibility of introducing negative interest rates in the months ahead, but extended its cheap funding scheme for banks that lend to small businesses.
The closing date for drawing down funds from the Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) will now run until the end of October next year, six months longer than planned.
The MPC’s unanimous decision to leave monetary policy unchanged came after it judged that the economic developments since its last meeting in early November had not changed the outlook significantly.
Sterling was not moved by the decision, having risen earlier in the day on optimism about a Brexit deal. Dean Turner, UK economist at UBS Global Wealth Management, said: “Some of the froth may come out [from sterling] as and when the deal is announced.”
The success of Covid-19 vaccines was the “main news” since the last meeting, the MPC said, and these would remove some of the risks of very poor economic performance and lower than expected inflation next year.
The economy would also be boosted by the additional public expenditure and Covid-19 support measures announced in the government’s November spending review, the MPC said.
But this good news was mitigated by the greater prevalence of Covid-19 among the UK population than the BoE had previously assumed, resulting in the November lockdown and stricter curbs subsequently imposed to tackle the virus.
“The restrictions on activity introduced after those lockdowns have been tighter than the committee had assumed in its November forecast, and are expected to weigh more on activity in [the first quarter of] 2021,” the minutes of the MPC’s December meeting stated.
The MPC said it still expected “a substantial further increase” in unemployment once the furlough scheme and other temporary job support programmes expired in the spring.
Thomas Pugh, of consultancy Capital Economics, said the positive vaccine news allowed the MPC to do nothing at this meeting. “As long as there is a Brexit deal, we don’t think it will need to loosen policy next year either,” he added, predicting that interest rates would not rise from the 0.1 per cent rate for the next five years.
Inflation, which sank to 0.3 per cent on the consumer price index measure in November, would probably rise significantly towards the BoE’s 2 per cent target in the spring, when temporary reductions in value added tax on the hospitality sector were removed and energy price falls of early this year dropped out of the 12-month comparisons, the minutes said.
The MPC said it would print money and buy government bonds at a similar pace at the start of 2021 to the current rate, allowing it the flexibility to slow purchases later in 2021 if economic conditions brighten significantly.
It also pledged to “take whatever additional action was necessary” if the economic outlook deteriorated and not to consider raising interest rates until there was “clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably”.
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