Bank Rate held at 0.1% with inflation and GDP forecasts slashed

by Neil Patterson

9:07 AM, 7th May 2020
About 6 months ago

Bank Rate held at 0.1% with inflation and GDP forecasts slashed

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Bank Rate held at 0.1% with inflation and GDP forecasts slashed

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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Comments

Mick Roberts

13:13 PM, 7th May 2020
About 6 months ago

Neil,

U simplify it so people like me can understand it.
You should write the Plain English Guide for the economists.

Keep overpaying u Landlords in these low interest rate times. DON'T waste the money.
U will be thankful in years to come if u overpay now.
We may never get times like this again.
If u don't overpay, use the money to invest so u have at least used the money to bring in more income which should cover future interest rate rises.

Beaver

15:14 PM, 7th May 2020
About 6 months ago

I read it. And this is what I wonder.

There is nothing really that new about Covid 19 or SARSCov2, whatever you want to call it. It's just a RNA virus doing what RNA viruses have always done. Viruses that are made of DNA are, like DNA, very stable. They don't chop and change much. But RNA viruses, like the influenza virus are like RNA...flexible, adaptive, and they always have been. Because they are adaptable they can jump species and that is why they tend to originate from certain parts of the world at certain times in history. These tend to be the places where large numbers of people are gathered together alongside multiple species.

So governments around the world are doing what they are doing to their economies. You can't really compare New Zealand to the UK because, if you've ever been there, you'll know that not only is their population density low, the density of their 'affordable' accommodation is also low. Their risk of the spread of respiratory viruses is not the same as in apartments in Northern Italy or Barcelona, or on the London Underground.

I was watching the Swedish epidemiologist who is taking charge of things in Sweden recently. I was moved not just by his grasp of the science, but also by his courage. He's likely to be villified. But the truth is that nobody is going to know whether he's right or not until after next winter...after we've seen whether there's another outbreak when we go into the next major period of risk for respiratory viruses.

But given that economists take the long term view here's the big question. If governments around the world trash their economies and create a recession that affects generations of people then much as the UK's war debt was around for generations, the debt created by the response of these governments (as opposed to the virus) will also be around for generations. And given that the conditions that gave rise to the emergence of Covid19 are still there, and that RNA viruses will continue to do what they've always done, another RNA virus is going to emerge and possibly spread before anybody has undone the economic damage caused by the last one.

Monty Bodkin

22:59 PM, 7th May 2020
About 6 months ago

Reply to the comment left by Mick Roberts at 07/05/2020 - 13:13
Keep overpaying u Landlords in these low interest rate times. DON'T waste the money.
U will be thankful in years to come if u overpay now.

Sod that Mick.
Instead of saving your pennies for Nottingham Council's next landlord licencing renewal tax, improving properties, providing decent homes etc.
-Go out and buy yourself a quality hot tub instead. I reckon you've earnt it;

https://www.hotspringworld.co.uk/showrooms/nottingham/


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