QE increased by £150 billion and Bank Base Rate held at 0.1%

by Neil Patterson

9:31 AM, 5th November 2020
About 4 weeks ago

QE increased by £150 billion and Bank Base Rate held at 0.1%

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QE increased by £150 billion and Bank Base Rate held at 0.1%

The Bank of England Monetary Policy Committee (MPC) has voted unanimously to maintain Bank Base Rate at 0.1% and to increase the stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves (Quantitative Easing), to take the total to £875 billion.

This cautious stimulus package was deemed necessary with softening consumer spending leading up to further Covid-19 restrictions and with CPI inflation levels currently at 0.5% leaving plenty of headroom for a medium-term target rate of 2%.

The MPC summary reflects the economic outlook remaining unusually uncertain depending on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom. It also depends on the responses of households, businesses and financial markets to these developments.

“Household spending and GDP are expected to pick up in 2021 Q1, as restrictions loosen. The level of activity in the first quarter is expected to remain materially lower than in 2019 Q4. UK trade and GDP are also likely to be affected during an initial period of adjustment, over the first half of next year, as the United Kingdom leaves the Single Market and Customs Union on 1 January and is assumed to move immediately to a free trade agreement with the European Union.

Over the remainder of the forecast period, GDP is projected to recover further as the direct impact of Covid on the economy is assumed to wane. Activity is also supported by the substantial fiscal policies already announced and accommodative monetary policy. The recovery takes time, however, and the risks around the GDP projection are judged to be skewed to the downside.

The fall in activity over 2020 has reflected a decline in both demand and supply. Overall, there is judged to be a material amount of spare capacity in the economy. The LFS unemployment rate rose to 4.5% in the three months to August, but it is likely that labour market slack has increased by more than implied by this measure. The extended Coronavirus Job Retention Scheme and new Job Support Scheme will mitigate significantly the impact of weaker economic activity on the labour market. The unemployment rate is expected to peak at around 7¾% in 2021 Q2. Beyond that point, spare capacity is expected to be eroded as activity picks up, and a small degree of excess demand emerges over the second half of the forecast period.

Twelve-month CPI inflation increased to 0.5% in September, but remained well below the MPC’s 2% target, largely reflecting the direct and indirect effects of Covid on the economy. These include the temporary impact of lower energy prices and the reduction in VAT, as well as some downward pressure from spare capacity. CPI inflation is expected to remain at, or just above, ½% during most of the winter, before rising quite sharply towards the target as the effects of lower energy prices and VAT dissipate. In the central projection, conditioned on prevailing asset prices, inflation is projected to be 2% in two years’ time.”


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Comments

Beaver

10:00 AM, 5th November 2020
About 4 weeks ago

These are interesting assumptions.

But as we leave the EU, the economy is only going to pick up if the chancellor makes the UK an attractive place to run a business, particularly an internet business, employ people or provide employment for self-employed people and have a pension. The chancellor also needs to make the UK a place where people have the confidence to spend their pensions, if he actually wants the hospitality sector to employ people; people need the time, the money and the confidence to "eat out to help out" and keep doing it.

Alistair Cooper

11:56 AM, 5th November 2020
About 4 weeks ago

Of course the other equally viable scenario is that this very ‘un Tory’ govt may choose to hike up corporation tax (and for that matter all indirect taxes) making the UK an even more unattractive place to do business with ever decreasing links & access to the much larger European market.
It would be great to see the hospitality sector thrive although there are very few that see bright light at the end of that tunnel. How many hospitality jobs pay in excess of £25.8k per year and warrant becoming an official ‘sponsor’ with the red tape fees and delays that entails....
I fear the easy option will be to attack and stifle free enterprise as they have done with s.24 and the plethora of other hurdles they have placed on the Private Rented Sector.
I hope I’m wrong ... I always prefer glasses half full!

Mick Roberts

7:09 AM, 8th November 2020
About 4 weeks ago

And for those that dare forecast, I can't see BOE going above 1% by 2025. Which is good for those that have tracker mortgages, but not savings.


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Latest tier restrictions are a pretty blatant attack on less wealthy areas of the country

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