Bank of England keeps record low 0.1% interest rate unchanged and says it expects stronger economic recovery than earlier thought
- The Bank of England said the economic outlook is still ‘unusually uncertain’
- The MPC cut interest rates to a record low of 0.1% almost exactly a year ago
- Britain’s economy contracted by a lower-than-expected 2.9% in January
The Bank of England (BoE) has voted unanimously to keep UK interest rates at 0.1 per cent as it revealed a more optimistic economic forecast for the country’s economy.
It said the massive fall in Covid-19 infections and hospitalisations and the ‘rapid’ rollout of the vaccination programme meant that lockdown restrictions would relax somewhat quicker than they previously forecast.
It added that US President Joe Biden’s $1.9trillion stimulus package should provide a further boost to the economy, while it believes the extension of the UK government’s job retention scheme to result in lower-than-expected unemployment levels.
The nine members of the Monetary Policy Committee (MPC) voted unanimously to maintain interest rate levels at their current record low levels
However, the group observed that the economic outlook was still ‘unusually uncertain’ and will depend considerably on what measures are taken on public health and how firms, households and financial markets will respond.
Official figures last week showed the economy contracted by 2.9 per cent in January as the lockdown took its toll, but this was less than feared and a far cry from the double-digit fall of last April at the height of the first wave.
Bank of England governor Andrew Bailey said on Monday that he was more positive over the economy’s future and expected it to return to pre-pandemic levels at the end of the year thanks to the vaccine programme’s ‘huge’ success.
The nine members of the Monetary Policy Committee (MPC) voted to maintain interest rate levels at their current record low levels just one day before the first-year anniversary it decided to reduce them to such a rate.
That initial cut came only eight days after it also slashed interest rates from 0.75 per cent to 0.25 per cent and the World Health Organisation declared the coronavirus was a pandemic.
The panel said it intends to continue with a loose monetary policy ‘until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably.’
The US Federal Reserve, led by Jerome Powell (pictured), also said yesterday that it intends to keep interest rates low for at least two years
It thinks the rate of inflation – currently at 0.7 per cent – will hit 2 per cent during the spring due to the recent rise in energy prices and oil prices falling out of the annual comparison in the coming months.
Even though the government’s Budget a fortnight ago announced the extension of consumption tax cuts, such as the freezing of duties on goods like fuel and beer, the MPC stated this would have only a ‘small downside’ effect on short-term inflation.
The US Federal Reserve also declared yesterday that it intends to keep interest rates low for at least two years despite upping its growth predictions for the American economy in 2021 from 4.2 per cent to 6.5 per cent.
Even though the government’s recent Budget froze duties on many goods such as beer, the MPC said this would have only a ‘small downside’ effect on short-term inflation
Paul Craig, a portfolio manager at Quilter Investors, said the Bank of England ‘is clearly following in the Federal Reserve’s footsteps with regard to tightening or tapering off monetary support.
‘It is still too early to think about these steps, and the evolution of the reopening is key. As such, the BoE will be very much focused on the vaccine rollout and continue with the status quo. ‘This should result in a tolerated overshoot on inflation.’
He added: ‘Real’ unemployment is running high just now, and the temporary support being withdrawn later this year could result in the scarring being deeper than feared.
‘However, the impact still remains uncertain. The key message Andrew Bailey will be wanting to get across to households is to be confident to spend those savings.
‘With a bit of patience, we still expect the second half of the year to be a lot brighter for the UK, provided the reopening timeline is kept to.’