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Base rate held at 0.1% but prospect of negative rate remains

Paloma Kubiak
Written By:
Paloma Kubiak

The Bank of England has maintained the base rate at a historic low 0.1% but the prospect of negative interest rates can’t be ruled out.

The Bank’s Monetary Policy Committee (MPC) voted unanimously to keep rates at 0.1% – the lowest in its history – and continue with its existing bond-buying programme.

Minutes from the meeting noted that the outlook for the UK and global economies “remains unusually uncertain” and depends on the evolution of the pandemic, the measures taken to protect public health and how governments, households and businesses respond to the health crisis.

As such, the committee said its medium-term projections “are a less informative guide than usual”.

However, on a more positive note, the MPC said spending has recovered significantly since the trough in activity in April. Household consumption in July was less than 10% below its level at the start of the year.

Further, housing market activity appears to have returned to close to normal levels, despite signs of a tightening in credit supply for some households.

While it noted employment appears to have fallen since the Covid-19 outbreak, it said this has been “very significantly mitigated by the extensive take-up of support from temporary government schemes” such as the Coronavirus Job Retention Scheme (furlough). But uncertainty remains and the unemployment rate is projected to rise to around 7.5% by the end of the year.

GDP continues to recover from the 20% slump reported in Q2 2020 from Q4 in 2019 as social distancing eased and consumer spending picked up further but the MPC said it is not projected to exceed its Q4 2019 level until the end of 2021.

Turning to inflation, it expects the figure to fall to 0.25% later this year, from the 0.6% figure recorded in June. This is due to the impact of energy prices and the temporary cut in VAT to 5% for the hospitality, holiday and attraction sector as announced by the chancellor last month. It expects to reach its target 2% inflation figure in two years’ time.

‘Two lost years of growth for the UK’

Laura Suter, personal finance analyst at investment platform AJ Bell, said any interest rate rise has been ruled out for the foreseeable future as the MPC indicated there are no plans to change either rates or the current asset buying programme until spare capacity is being eliminated.

She said: “The Bank now forecasts that UK GDP will return to its 2019 levels by the end of next year, meaning it’s expecting two lost years of growth for the UK. It’s buoyed by the fact that people are getting out and spending more, no doubt fuelled by the summer holidays and lots of people staycationing, while Rishi Sunak’s stamp duty giveaway has also put the rocket boosters under the housing market, with the Bank saying it has returned homebuying to near-normal levels.

“However, the bank paints a bleaker picture on the outlook for employment and business spending and cautions that the UK’s future is ‘unusually uncertain’ thanks to the continued spread of the Coronavirus. What’s more, it expects inflation to fall back after a rise in July and hover around the 0.25% mark later this year. Worries about a second wave of Covid-19 mean the economic outlook is particularly uncertain and that negative interest rates can’t be ruled out. Any rate rise is miles away and savers will continue to see paltry returns on their cash.”