The Bank of England’s Monetary Policy Committee has made the unanimous decision to keep interests rates at 0.1%. The Committee also voted unanimously to continue with its existing programmes of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, maintaining the target for the total stock of these purchases at £745bn.
The outlook for the UK and global economies remains unusually uncertain and will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors. Overall, the MPC’s projections assume that the direct impact of Covid-19 weakens gradually over the forecast period.
Moreover, the UK’s GDP is expected to have been around 20% lower in the second quarter of 2020 compared to the same time in 2019. However, higher-frequency indicators imply that spending has recovered significantly since the trough in activity in April. According to the banks data, household consumption in July was less than 10% below its level at the start of the year. Numerous survey data suggests that business investment is likely to have fallen dramatically during the second quarter and investment intentions remain very weak.
Furthermore, employment appears to have fallen significantly since the pandemic started, however this has been mitigated in part by the governments various support schemes. In the near future, the unemployment rate is expected to rise materially, to over 7% by the close of the year.
In the MPC’s central projection, GDP continues to recover beyond the near term, as a result of social distancing easing and as consumer spending picks up faster. Business investment also recovers, but this appears to be somewhat slower.
The committee has said it will continue to monitor the situation closely and is ready to adjust monetary policy accordingly to meet its remit. The committee will next reconvene on 17th September.
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