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November 05, 2020BANK OF ENGLAND MONETARY POLICY The Bank of England announced that the bank rate would continue to be 0.1 per cent at its Monetary Policy Committee (MPC) meeting today.
Against the backdrops of softened economic conditions and a very uncertain outlook, the Monetary Policy Committee decided that additional easing of monetary policy is needed. The Bank of England increased the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion. The Committee will also keep the asset purchase programme under review.
The COVID-19 pandemic had a severe negative impact on jobs, income and spending in the UK. During the lockdown, many businesses closed down and people lost their jobs. While economic activity started to pick up as restrictions eased, it remains below pre-COVID levels.
The number of COVID cases in the UK has been increasing since the Committee’s last meeting in September. As a result, the UK government has increased the severity of COVID restrictions in place for the period of November 5 to December 2, which is expected to reduce spending further. The latest economic indicators point to a softening in consumer spending and investment intentions.
According to the latest monthly estimate, UK GDP increased 2.1 per cent in August. More than half of the pickup in August was accounted for by a sharp rise in accommodation and food services output, supported in part by the Government’s Eat Out to Help Out (EOHO) scheme. The Bank estimates that GDP in September grew at a similar rate to that in August, leaving the level of GDP in 2020 Q3 as a whole 9 per cent below its 2019 Q4 level and in line with the August Monetary Policy Report projection.
Household spending and GDP are expected to pick up in 2021 Q1, as restrictions loosen. The level of activity in the first quarter is expected to remain materially lower than in 2019 Q4. UK trade and GDP are expected to be affected during an initial period of adjustment, over the first half of next year, as the United Kingdom leaves the Single Market and Customs Union on 1 January and is assumed to move immediately to a free trade agreement with the European Union.
CPI inflation increased 0.5 per cent in September, well below the Bank’s target of 2 per cent. This reflected mainly the impacts of lower energy prices and the reduction in VAT as well as some downward pressure from spare capacity. The Bank expects CPI inflation to remain at, or just above, 0.5 per cent during most of the winter, before rising quite sharply towards the target as the effects of lower energy prices and VAT dissipated.
The outlook for the economy remains unusually uncertain and depend mainly on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom. The outlook also depends on the responses of households, businesses and financial markets to these developments.
The Committee notes that it will continue to monitor the situation carefully and stands ready to take whatever additional action is ready to achieve its target. 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 per cent inflation target sustainably.
Source: Bank of England, Monetary Policy
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