UK

Bank leaves rates at record low of 0.1% as it awaits Brexit trade deal outcome

Bank of England leaves rates at record low of 0.1% and holds off on buying more Government bonds as it awaits the outcome of Brexit talks

  • All nine members of the Monetary Policy Committee voted to keep rates on hold
  • The Bank also left its Government bond-buying programme unchanged 
  • But it signalled it was ‘ready to take whatever additional action’ in future
  • Economy has been stronger than BoE expected in recent months 
  • But latest Covid curbs are tougher than it anticipated, and will drag economy down this month and in first quarter of 2021 

Bank of England policymakers have kept interest rates on hold and left the bond-buying programme unchanged as they wait to see what will happen with the EU trade deal talks. 

All of the nine members of the Monetary Policy Committee voted to keep interest rates at their historic low of 0.1 per cent at today’s meeting. 

They did so as they warned the outlook for the economy remained ‘unusually uncertain’ and depended on the evolution of the pandemic, related restrictions as well as the outcome of talks with the EU. 

On hold: The Bank of England has kept rates and quantitative easing unchanged 

The Bank also left its bond-buying programme unchanged, after announcing the purchase of another £150billion of government bonds last month. 

The Bank has created £895billion of emergency cash through so-called quantitative easing since the last financial crisis, including £450billion so far this year following the outbreak of Covid-19.   

This involves the Bank ‘printing’ more digital money and using it to by buying assets such as government bonds from banks, which in turn are expected to pump those money into the economy by lending out to businesses and people.

‘The outlook for the economy remains unusually uncertain,’ the Bank said.

‘It depends 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 Bank said the economy had been stronger than it expected in recent months.

It now forecast a less severe contraction of just over 1 per cent in the final quarter of the year, compared to a 2 per cent fall it predicted last month

The latest vaccine developments were also ‘likely to reduce the downside risks to the economic outlook’, the Bank said.

However, the rapid rise in coronavirus infections and the latest round of restrictions were stricter than it assumed in November, and would result in a bigger-than-expected economic hit in December and weigh on the first quarter of 2021.

It also warned over uncertainties posed by a no-deal Brexit, signalling that further monetary policy action could be on the way in the case of the UK and EU failing to strike a deal. 

‘The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit,’ it said. 

The MPC said that, in case of a no-deal, the pound would probably fall, while inflation would likely be higher and growth lower than previously assumed. 

Policymakers said they would ‘tolerate’ a temporary overshoot of the inflation target, in case of a no-deal.  

The update from the Bank comes as the UK is in last-ditch talks with the European Union over a trade deal and new restrictions are being imposed ahead of Christmas to limit the spread of Covid.  

Laith Khalaf, financial analyst at AJ Bell, said: ‘The Bank of England won’t make its next move until it knows which way Brexit is heading. 

‘In the event of no-deal, it would likely be willing to look through the temporary jump in inflation as a result of weaker sterling and the imposition of tariffs, but it couldn’t turn a blind eye to the economic impact of a disorderly Brexit.

‘The Bank’s governor has said no deal would have a greater long-term economic effect than the pandemic, so we can expect further stimulus should Brexit talks fail, either in the form of more QE, or interest rate cuts.’ 

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