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The Bank of England has warned that the rising rate of coronavirus infections and a lack of clarity about the UK’s future trade relationship with the EU could threaten economic recovery.
He said that much of the production lost during the lockdown had been recovered, but the outlook remained “unusually uncertain.”
The UK is still in a deep recession, while Covid-19 infections are at their highest since mid-May.
Citing the uncertainty, the Bank kept interest rates at 0.1%, a record low.
He added that he would continue with his monetary support to the economy, but did not increase his bond purchase program or reduce interest rates even further.
What are interest rates?
If you borrow money, you usually have to pay a small fee set by the person who lends you the loan. The amount of that fee, or interest rate, depends on a “base rate” set by the Bank of England at meetings throughout the year.
The rate determines how much banks have to pay to borrow money, and that has a knock-on effect on how much the bank charges consumers to borrow.
When the economy grows rapidly, the Bank tries to stop its overheating by raising interest rates, which makes borrowing more expensive.
When the economy is sluggish, lowering the bank’s base rate lowers the cost of borrowing and can encourage businesses and consumers to spend more.
The Monetary Policy Committee (MPC), which sets interest rate policy, said that previous projections of economic recovery were based “on the assumption of an immediate and orderly move toward a comprehensive free trade agreement with the European Union on January 1, 2021 “.
Economic recovery will also depend on the evolution of the pandemic and the measures taken to protect public health, the MPC said.
“The recent increases in Covid-19 cases in some parts of the world, including the UK, have the potential to weigh more on economic activity, albeit probably on a smaller scale than that seen earlier in the year,” he said.
No change from the Bank of England in historically low interest rates, nor in its broader support for the economy. At first glance, the economy is less weak than expected even last month, but deep uncertainties remain.
The Bank, in particular, noted “recent increases in Covid-19”, including in the UK, which “have the potential to further weigh on economic activity”, as well as a recent fall in the British pound in part ” reflecting recent Brexit developments. “
With rates already at lows, the British pound was further affected by the fact that the Bank’s deliberations on rates included a presentation on how “negative interest rates” might work.
The Bank was concerned about the impact of, in effect, lenders paying borrowers for the health of parts of the banking system. As noted above, how this could be achieved in practice is under study. Should the uncertainties visible to all materialize in the coming weeks for the UK, this extraordinary and unprecedented tool is being prepared as an option.
The government has had to impose new social distancing restrictions in England, as the increase in cases has forced many areas to lock down locally.
On Wednesday, the prime minister said the government was doing “everything in our power” to prevent another national shutdown, which could have “disastrous” financial consequences for the UK.
Negative rates
The Bank of England said that despite a stronger-than-expected recovery in recent months, the economy was still 7% smaller than at the end of last year.
Generally, if the economy is not growing strong enough, the Bank of England considers lowering interest rates to encourage businesses to invest and savers to spend.
However, interest rates are already close to zero after two emergency rate cuts in March.
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, appeared to dismiss that, although he said negative interest rates remained in the “toolbox.”
If interest rates are negative, the Bank of England charges for the deposits it holds on behalf of the banks. That encourages banks to lend the money to companies instead of depositing it.
- What are negative interest rates?
- What exactly is the Bank of England interest rate?
The Bank also noted that it had no intention of raising interest rates until “significant progress” had been made to bring 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 two years.
“We expect interest rates to not exceed 0.1% over the next five years,” said Andrew Wishart, a British economist at Capital Economics.
