The Bank of England (BoE) held monetary policy steady yesterday for the second meeting in a row. Interest rates were left at 0.1 per cent and bond-buying at £745bn in a business-as-usual decision.
All nine members of the monetary policy committee (MPC) voted in favour of continuing this monetary policy. But analysts, investors and traders continued to hotly debate how the Bank will proceed in the coming months.
The Bank was relatively upbeat about the economy, saying the recovery had been “a little stronger” than expected. However, it warned that coronavirus could knock it off course.
Most of the talk after yesterday’s decision was about negative interest rates. The meeting’s minutes showed that the MPC discussed how they could be implemented, should the economy need them.
They also said the BoE will begin “structured engagement” with the Prudential Regulation Authority (PRA) on “policy considerations” in the fourth quarter.
Here’s what economists and analysts made of the Bank’s latest meeting.
Negative interest rates: to cut or not to cut?
The pound slid yesterday after the meeting’s minutes showed that the Bank was taking the possibility of negative interest rates relatively seriously.
However, chief UK economist at Oxford Economics Andrew Goodwin said, the “structured engagement” with the PRA was nothing more than a formality.
“That the BoE is merely beginning to consult on the implications of negative rates confirms this is not an active policy option in the near-term,” he said.
Yet Nigel Green, founder and chief executive of De Vere Group, took the minutes more seriously. He said that personal financial strategies should be reviewed to ensure they are “negative interest rate ready”.
“This would have been unimaginable even a few months ago. But the shifts have been seismic this year.”
Andrew Wishart, UK economist at consultancy Capital Economics, expected quantitative easing (QE) to “remain the tool of choice” for months ahead. Under QE, the Bank creates money and buys government and corporate bonds to keep borrowing costs low.
“The Bank will only start working out how to put negative rates into practice in the fourth quarter,” he said. “And even then it will remain concerned about their effectiveness when banks are absorbing loan losses.”
Bank flags ‘unusually uncertain’ outlook
The Bank said its fast data had shown the UK’s economic recovery was stronger than it had predicted in August. “Consumption has continued to recover during the summer and is now at around its start-of-year level in aggregate,” it said.
Jacqui Douglas, macro strategist at TD Securities, said the statement was “more upbeat than we had expected”.
She said that reflected “a slightly stronger rebound into the third quarter”. Douglas also flagged that there was “no mention of the risks to growth into 2021, which is where some MPC members had expressed a lot more concern”.
However, the Bank cautioned that the spread of Covid in the UK and Europe could knock the recovery off track.
Howard Archer, chief economic adviser to the EY Item Club, said: “The members seemed wary of the downside risks to the recovery, stemming from rising coronavirus cases.” He pointed out that “the possibility of persistently high unemployment” was also one of the Bank’s worries.
Eyes turn to the November meeting
The Bank gave little indication that it plans to boost stimulus in November. But many analysts predict it will increase its bond-buying target as demand built up during lockdown peters out.
Wishart said he predicted “more than the consensus expects”. He said: “We’ve pencilled in an extra £250bn of QE over the course of the next year, with an instalment of £100bn in November.”
Pantheon Macroeconomics’ chief UK economist Samuel Tombs said: “Our view remains that the MPC will authorise a further £50bn of asset purchases before the end of this year, and then a further £50bn of purchases in the first quarter [of 2021].”