The Bank of England has kept monetary policy on hold, saying the UK economy’s recovery had been “a little stronger” than expected but warning that coronavirus could knock it off course.
The Bank kept its main interest rate at the record-low level of 0.1 per cent, and the bond-buying target stayed at £745bn. The vote was unanimous, with no policymakers voting to cut rates or boost purchases.
In a statement, the Bank’s monetary policy committee (MPC) said it “does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the two per cent inflation target sustainably”.
The pound slid after the decision, however, as the minutes showed the Bank was consulting on how to cut interest rates into negative territory, should the economy warrant such a move. Sterling was down 0.6 per cent to $1.289.
It was the second meeting in a row that the Bank held policy after increasing bond-buying by £100bn in June. Threadneedle Street slashed interest rates from 0.75 per cent to 0.1 per cent at two emergency meetings in March.
The UK economy contracted by a record 20.4 per cent in the second quarter. But the MPC today said the rebound had been solid, although it warned that rising coronavirus cases could derail the recovery.
It said: “High-frequency payments data suggest that consumption has continued to recover during the summer and is now at around its start-of-year level in aggregate.”
Bank says UK economy recovering better than thought
The Bank’s August monetary policy report predicted the UK economy would shrink by 9.5 per cent this year. It said it would then grow nine per cent in 2021.
Yet the BoE today said: “Recent domestic economic data have been a little stronger than the Committee expected.”
However, it added: “Given the risks, it is unclear how informative they are about how the economy will perform further out.”
One such risk to the economy is rising coronavirus cases. There were 3,991 new Covid cases in the UK yesterday. That was up from 3,105 the day before and was considerably higher than the numbers seen in recent weeks.
The Bank said: “The recent increases in Covid-19 cases… have the potential to weigh further on economic activity.”
Pound slides as Bank weighs negative interest rates
The Bank’s minutes showed that the MPC discussed negative interest rates. They also said the BoE will soon begin “structured engagement” with the Prudential Regulation Authority on “policy considerations”.
Negative interest rates were officially added to the Bank’s policy “toolbox” in August. However, Bailey has said the central bank currently has no plans to use them.
Today’s minutes show the BoE is taking the idea seriously, however. They said the MPC had been briefed on “plans to explore how a negative bank rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates”.
Ranko Berich, head of market analysis at foreign exchange firm Monex Europe, said the BoE had “vindicated” bets by traders that it will cut rates “at some point in the next 12 months”.
“Sterling has taken another knock on the news, compounding woes from the latest rash of Brexit developments.” Lower interest rates make investments in pounds less attractive.
The yield on the three-year UK government bond fell 0.045 percentage points to minus 0.143 per cent. Yields move inversely to price, showing that investors were buying bonds in response to the minutes, as lower rates increase their attractiveness.