Bank Rate held at 0.1% with inflation and GDP forecasts slashedMake Text Bigger
The Bank of England Monetary Policy Committee (MPC) voted unanimously yesterday to hold the Bank Base Rate at 0.1% . They also voted 7-2 for the Bank of England to continue with the programme of £200 billion quantitative easing.
CPI inflation fell below the medium term target of 2% to 1.5% in March and is likely to fall below 1% in the next few months reflecting large decreases in energy prices.
Payment transaction figures indicate a reduction in household consumption of around 30%, housing market activity has practically ceased and companies’ sales are expected to be around 45% lower than normal Q2 and business investment 50% lower. Despite widespread company use of the Coronavirus Job Retention Scheme there has been a sharp increases in benefit claims indicating a pronounced rise in the unemployment rate.
The MPC has constructed a plausible illustrative economic scenario and is based on a set of stylised assumptions about the pandemic and the responses of governments, households and businesses, and, as usual, on the prevailing levels of asset prices and the market path for interest rates. While the scenario is highly conditional, it helps to illustrate the potential impact of Covid-19 on the economy and the channels through which the impact is felt.
The illustrative scenario incorporates a very sharp fall in UK GDP in 2020 and a substantial increase in unemployment in addition to those workers who are furloughed currently. Given the assumed path for the relaxation of social distancing measures, the fall in GDP should be temporary and activity should pick up relatively rapidly. Nonetheless, because a degree of precautionary behaviour by households and businesses is assumed to persist, the economy takes some time to recover towards its previous path. CPI inflation is expected to fall further below the 2% target during the second half of this year, largely reflecting the weakness of demand.
As set out in the accompanying interim Financial Stability Report, the Financial Policy Committee (FPC) has assessed the risks to UK financial stability and the resilience of the UK financial system to the economic and market shocks associated with Covid-19. Drawing on the MPC’s illustrative scenario, the FPC judges that the core banking system has capital buffers more than sufficient to absorb losses and, supported by government guarantees for new lending and Bank of England funding, the capacity to provide credit to support the UK economy.
In the illustrative scenario, the recovery in economic activity is relatively rapid and inflation rises to around the 2% target, conditional on the scenario assumptions that include a gradual easing in social distancing, and supported by the very significant monetary and fiscal stimulus. Relative to the scenario, the Committee assesses that the balance of risks to the economic outlook lies to the downside.
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