The Bank of England (BoE) left interest rates and stimulus unchanged on Thursday, but cut its 2021 growth forecast owing to the deadly coronavirus crisis - despite a global vaccine rollout.
BoE policymakers voted to keep borrowing costs at a record-low 0.1%, after their first monetary policy meeting since Britain’s divorce from the European Union at the start of January. The bank also cut its 2021 gross domestic product growth forecast to 5% from 7.25%, while hinting at the possibility of implementing negative interest rates later this year.
“Covid-19 vaccination programmes are under way in a number of countries, including the United Kingdom, which has improved the economic outlook,” the BoE said.
“Nevertheless, 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 re-imposition of restrictions.”
Much of the UK re-entered lockdown in early January to curb variant strains that are deemed to be more transmissible, with restrictions similar to the initial Covid curbs imposed in the second quarter of 2020. However, more than 10 million people in the UK have now received a first dose of Covid-19 vaccine.
The BoE, meanwhile, noted on Thursday that Britain and the European Union reached a trade agreement that has been applied since January 1, averting a chaotic no-deal Brexit.
It signalled that Britain would likely avoid a double-dip recession with marginal growth expected in the final three months of last year.
The BoE also declared that it was “appropriate” to start preparations for the potential introduction of negative interest rates in six months’ time. A negative interest rate would likely see retail banks further cutting their own borrowing costs, which would be unwelcome news for savers but a boost for borrowers.
The radical policy - which has already been employed by the Bank of Japan and the European Central Bank - has been under consideration for some time in Britain.
“Commercial banks need at least six months to prepare for negative rates and the central bank has now put them on notice, potentially paving the way for negative interest rates from August,” noted AJ Bell analyst Laith Khalaf.
“It is likely markets will take this as a negative sign for longer term UK interest rate policy, even if it is designed simply to cover all bases as the pandemic continues to elevate economic uncertainty.”
The BoE said that the economy was about 8% smaller in the fourth quarter than before the pandemic began in early 2020.
Published in The Express Tribune, February 5th, 2021.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ