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Base rate unchanged at 0.1% as Covid weighs on economic outlook

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17/12/2020
The Bank of England has maintained the base rate at a historic low 0.1% as it warns the Covid effect leaves the outlook for the economy “unusually uncertain”.

The Bank’s Monetary Policy Committee (MPC) voted unanimously to keep rates at 0.1% – the lowest in its history, despite further mumblings of the introduction of negative rates.

The total stock of asset purchases stands at £895bn.

Minutes from the meeting noted that the rollout of the Covid vaccine is likely to reduce the downside risks to the economic outlook.

But given the increase in Covid cases, global activity has been affected due to the lockdown restrictions and UK GDP growth in Q4 2020 “is likely to be a little weaker than expected at the time of the November report”.

The minutes read: “The near-term UK outlook has evolved broadly in line with the Committee’s expectations in the November Report. UK GDP grew by 0.4% in October, leaving it 8% below its level in 2019 Q4. Activity has been stronger than expected, despite the recent rise in Covid cases and associated lockdowns.

“Nevertheless, the restrictions on activity introduced after those lockdowns have been tighter than the Committee had assumed in its November forecast, and are expected to weigh more on activity in Q1 2021. The successful rollout of vaccines should support the gradual removal of restrictions and rebound in activity that was assumed in the November Report, although it is less clear how this prospect will affect the immediate economic behaviour of households and businesses.”

It added: “The outlook for the economy remains unusually uncertain. It depends 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.

“The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”

One in four chance of rate cut in 2021

Laith Khalaf, financial analyst at AJ Bell, said: “The Bank of England won’t make its next move until it knows which way Brexit is heading. In the event of no-deal, it would likely be willing to look through the temporary jump in inflation as a result of weaker sterling and the imposition of tariffs, but it couldn’t turn a blind eye to the economic impact of a disorderly Brexit.

“The Bank’s governor has said no deal would have a greater long-term economic effect than the pandemic, so we can expect further stimulus should Brexit talks fail, either in the form of more QE, or interest rate cuts. On the latter, the Bank is already flirting with its effective lower bound, and there has been a chorus of groans from high street banks about the prospect of negative rates.”

He added that despite the boost in confidence provided by vaccines, markets are pricing in a one in four chance of a rate cut in 2021, which would leave rates at zero, or below.

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