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Base rate unchanged with Brexit fallout likely to dictate next move

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  • 17/12/2020
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Base rate unchanged with Brexit fallout likely to dictate next move
The Bank of England has maintained its base rate at the historic low of 0.1 per cent as it warns the Covid-19 effect leaves the outlook for the economy “unusually uncertain”.

 

The bank’s Monetary Policy Committee (MPC) voted unanimously to keep rates at their lowest in its history, despite further speculation about the introduction of negative rates.

It also voted to maintain its quantitative easing process, with the total stock of asset purchases standing at £895bn.

Minutes from the meeting noted that the rollout of the Covid-19 vaccine is likely to reduce the downside risks to the economic outlook.

But given the increase in coronavirus cases, global activity has been affected due to the lockdown restrictions and UK GDP growth in Q4 2020 “is likely to be a little weaker than expected at the time of the November report”.

The minutes read: “The near-term UK outlook has evolved broadly in line with the Committee’s expectations in the November Report.

“UK GDP grew by 0.4 per cent in October, leaving it eight per cent below its level in 2019 Q4. Activity has been stronger than expected, despite the recent rise in Covid-19 cases and associated lockdowns.

“Nevertheless, the restrictions on activity introduced after those lockdowns have been tighter than the committee had assumed in its November forecast, and are expected to weigh more on activity in Q1 2021.”

It noted that the successful rollout of vaccines should support the gradual removal of restrictions and rebound in activity that was assumed in the November report, although it was less clear how this would affect the immediate economic behaviour of households and businesses.

It added: “The outlook for the economy remains unusually uncertain.

“It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom.

“The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the two per cent inflation target sustainably.”

 

Bank could act to support Brexit fallout

Santander UK chief economist Frances Haque noted the decision to leave the rate unchanged was expected given talks over a possible trade deal with the EU were continuing.

“However, should trade talks end without a deal, the Bank of England stands ready to intervene with support likely to be in the form of a combination of measures designed to support financial markets and the UK economy,” she said.

“If necessary, the Bank of England could enact these prior to its next meeting in February next year.

“Should a deal be struck then the Bank of England will continue to monitor the progress of the UK economy and if required – for example if a further full lockdown ensued – could provide additional support.”

 

One in four chance of rate cut in 2021

Laith Khalaf, financial analyst at AJ Bell, agreed that the central bank would not make its next move until it knew which way Brexit was heading.

“In the event of no-deal, it would likely be willing to look through the temporary jump in inflation as a result of weaker sterling and the imposition of tariffs, but it couldn’t turn a blind eye to the economic impact of a disorderly Brexit,” he said.

“The bank’s governor has said no deal would have a greater long-term economic effect than the pandemic, so we can expect further stimulus should Brexit talks fail, either in the form of more QE, or interest rate cuts.

“On the latter, the bank is already flirting with its effective lower bound, and there has been a chorus of groans from high street banks about the prospect of negative rates.”

He added that despite the boost in confidence provided by vaccines, markets are pricing in a one in four chance of a rate cut in 2021, which would leave rates at zero, or below.

 

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