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The Bank of England has warned that rising rates of coronavirus infection and a lack of clarity about the UK’s future trade relationship with the European Union could jeopardize economic recovery.
He says most of the product lost during the lockdown has been recovered but the appearance remains “unusually uncertain”.
The UK is still in recession, while Covid-19 infections are at their highest level since mid-May.
Citing uncertainty, the bank kept interest rates at a historically low level of 0.1%.
He added that he would continue his financial support for the economy, but stopped short of raising its bond-buying program or lowering interest rates further.
What is the interest rate?
If you borrow money, you usually have to pay a small fee set by the lender. How high that fee – or interest rate – is – depends on the “base rate” that is set by Bank of England in meetings throughout the year.
Rates determine how much banks have to pay to borrow money, and how much they charge customers to borrow.
When the economy is growing fast, banks try to stop it from heating up by raising interest rates, making it more expensive to borrow.
When the economy is sluggish, lowering the bank’s base rate lowers the cost of borrowing and encourages businesses and consumers to spend more.
The Monetary Policy Committee (MPC), which sets interest rate policy, said previous estimates of economic recovery were expected to move immediately, systematically, into a comprehensive free trade agreement with the European Union on 1 January 2021.
Economic recovery will also depend on the evolution of the epidemic and measures to protect public health, the MPC said.
“The recent increase in Covid-1 cases in some parts of the world, including the United Kingdom, is likely to place more emphasis on economic activity, although at a lower level than earlier this year.
No changes were made to the record low interest rates from Bank of England, or on the broad support for its economy. On its face, the economy is weaker than expected last month, but uncertainty remains.
The bank specifically pointed to the “recent rise in Covid-19”, including in the UK, which is “likely to place more emphasis on economic activity”, as well as the recent decline in sterling “reflecting the recent Brexit growth”.
Given that rates are already at the bottom of the line, Sterling has been hit even harder by the fact that the bank’s discussion of rates includes a presentation on how “negative interest rates” will work.
The bank was concerned about the impact of lenders effectively on the health of parts of the banking system. Given how this can be achieved in practice, as indicated earlier, it is. For the UK to meet all the visible uncertainties in the coming weeks, this extraordinary and unprecedented tool is being developed as an alternative.
The government had to ban new social distances across England, as growing cases have pushed many areas to local lockdowns.
The Prime Minister on Wednesday said the government was doing “everything in our power” to prevent a nationwide lockdown, which could have “catastrophic” financial consequences for the UK.
Negative rate
The Bank of England said that despite stronger-than-expected recovery over the past few months, the economy was still about 7% lower than at the end of last year.
Generally if the economy is not growing fast enough, the Bank of England considers interest rates to reduce savings to encourage companies to invest and save.
However, after two cuts to the emergency rate in March, interest rates are already close to zero.
The minutes of this month’s meeting show that the MPC discussed the use of negative interest rates to stimulate the economy. Last month, the bank’s governor, Andrew Bailey, ruled out it, although he said negative interest rates have remained in the “tool box”.
Bank of England charges for any deposits made on behalf of the bank if the interest rate is negative. Which encourages banks to lend for lending rather than depositing money.
- What is a negative interest rate?
- What exactly is the interest rate of Bank of England?
The bank has also indicated that it has no intention of raising interest rates until there is “significant progress” to get inflation back to the bank’s 2% target. It is currently at a five-year low of 0.2%.
The bank said it did not expect inflation to return to target levels for another two years.
“We expect interest rates to not exceed 0.1% for the next five years,” said Andrew Wishart, a UK economist at Capital Economics.
