Bank of England warns coronavirus resurgence threatens UK economic recovery

The resurgence of coronavirus across Europe is likely to slow the UK’s economic recovery which had been exceeding expectations, the Bank of England’s rate setting committee said after its September meeting. Voting unanimously to hold interest rates at 0.1 per cent and the level of quantitative easing at £745bn, the […]

The resurgence of coronavirus across Europe is likely to slow the UK’s economic recovery which had been exceeding expectations, the Bank of England’s rate setting committee said after its September meeting.

Voting unanimously to hold interest rates at 0.1 per cent and the level of quantitative easing at £745bn, the Monetary Policy Committee on Thursday issued a warning that Covid-19 and an antagonistic end to the Brexit transition period threatened the UK economy.

If there was a downturn, the BoE indicated that it would now be in a better position to use negative interest rates as part of the toolkit, although the MPC made no comment on whether it was more inclined to use them.

During the past six weeks central bank officials briefed the rate-setting committee on how pushing interest rates below zero would work in practice and how they would seek to ensure that they would not squeeze bank profit margins so much as to be counter-productive and curb lending.

Sterling declined on the evidence that the BoE was better prepared for pressing the button on negative rates in a future downturn, losing 0.7 per cent on the day as currency traders inferred further rate cuts were now likely.

The consensus view in financial markets was that the BoE was confirming expectations that interest rates were now likely to move into negative territory early next year. Economists at Citibank said the briefing on negative rates suggested the MPC would now lower rates on “a cautious path into negative territory in 2021”.

But other economists said the BoE’s announcement that it would “begin structured engagement on the operational considerations” of negative rates in the fourth quarter indicated the MPC was in no hurry.

Andrew Goodwin, chief UK economist at Oxford Economics, a consultancy, said: “The announcement that a consultation on negative interest rates will begin in Q4 confirms this is not an active policy option in the near-term.”

The BoE declined to comment on market moves or speculation over negative rates.

Commenting on the UK economic outlook, the MPC said: “The recent increases in Covid-19 cases in some parts of the world, including the United Kingdom, had the potential to weigh further on economic activity, albeit probably on a lesser scale than seen earlier in the year.”

This was likely to weaken a recovery, which had been faster than the BoE expected in its early August meeting. Referring to the recent strong economic data, the MPC signalled that it expected a slowdown in the months ahead, noting “it was unclear how informative [the data] were about how the economy would perform further out”.

The committee also highlighted the renewed Brexit tensions as an additional threat. The evolution of the economic recovery “would depend on the . . . nature of, and transition to, the new trading arrangements between the EU and the UK”.

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The MPC was not expected to announce policy changes in the September meeting, but most economists still expect an extension of quantitative easing in the November meeting which will be accompanied by new BoE quarterly economic forecasts. At the current rate of money creation and asset purchases, the bank will reach its £745bn quantitative easing target around the end of the year.

Although it has not yet adopted the US Federal Reserve’s strategy of targeting a period of modestly-above-target inflation to help the recovery, the BoE pledged not to do anything that might undermine the recovery or tighten policy too quickly.

“The committee did not intend to tighten monetary policy until there was clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably,” it said in the minutes.

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