Bank Base rate unmoved at 0.1%

The Monetary Policy Committee (MPC) voted unanimously to maintain Bank Rate at 0.1% and to make no changes to the quantitative easing program.

The effect of increased coronavirus cases and the third national lockdown is being offset in the medium term by the vaccination roll out to keep targeted inflation at 2%.

The inflation report summary indicates:

UK GDP is expected to have risen a little in 2020 Q4 to a level around 8% lower than in 2019 Q4. This is stronger than expected in the November Report. While the scale and breadth of the Covid restrictions in place at present mean that they are expected to affect activity more than those in 2020 Q4, their impact is not expected to be as severe as in 2020 Q2, during the United Kingdom’s first lockdown. GDP is expected to fall by around 4% in 2021 Q1, in contrast to expectations of a rise in the November Report.

Labour market indicators remain difficult to interpret. The unemployment rate rose to 5.0% in the three months to November, but other indicators suggest that labour market slack has remained higher than implied by this measure. The Government’s employment support schemes are likely to limit significantly the immediate rise in unemployment. A further increase in unemployment is projected over the next few quarters. Average Weekly Earnings growth has been notably stronger than expected in the November Report, although this may overstate underlying pay growth.

Twelve-month CPI inflation rose from 0.3% in November to 0.6% in December. The weakness of recent figures largely reflects the direct and indirect effects of Covid on the economy. CPI inflation is expected to rise quite sharply towards the 2% target in the spring, as the reduction in VAT for certain services comes to an end and given developments in energy prices.

The outlook for the economy remains unusually uncertain. It depends on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments.

The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy eg increase interest rates at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.

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