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Bank of England holds base rate at 0.1%

Paloma Kubiak
Written By:
Paloma Kubiak

The Bank of England kept the base rate at its historic low level of 0.1% as it looks to respond to the severe economic and financial disruption caused by coronavirus.

The Monetary Policy Committee (MPC) voted unanimously to maintain the base rate at 0.1% after previously cutting the rates from 0.75% to 0.25%. This is the lowest ever level in the history of the Bank.

Members also voted unanimously to continue its programme of Quantitative Easting (QE) by purchasing £200bn of UK government bond and sterling non-financial investment-grade corporate bonds, taking holdings to £645bn.

Minutes of the meeting read: “The spread of the disease and the measures that are likely to be needed to contain it have evolved significantly. The economic consequences of these developments are becoming more apparent and a very sharp reduction in activity is likely. Given the severity of that disruption, there is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment.

“In the near-term, many people will be unable to work for a period and others are adjusting their working arrangements. Many consumer-facing companies are now required to cease operations for a time, while other businesses have also needed to cease or scale back their activities.

“Household spending on social activities and other delayable forms of consumption is likely to decline materially. In an environment of heightened uncertainty, businesses are likely to postpone investment decisions. Exports are likely to weaken. These effects on economic activity will be offset partly by temporarily higher spending on essential goods and services. Nonetheless, business cashflows will be severely affected in a way that, without support measures, would threaten material numbers of businesses failing, and large and persistent rises in unemployment.”

They added that global GDP will fall sharply during the first half of this year and sterling has already depreciated sharply.

Further, CPI inflation was 1.7% in February and was set to fall further below the MPC’s 2% target. However, given the current situation, it is now likely to fall below 1% in the spring “reflecting the pass-through to fuel prices of the recent and sharp decline in the oil price”.

Further ahead, inflation will be boosted by the significant depreciation of the sterling exchange rate.

“The MPC will be monitoring closely developments in inflation and in indicators of inflation expectations, including those of households, businesses and financial markets”, it added.