The Bank of England left interest rates and stimulus unchanged Thursday, but cut its 2021 growth forecast owing to the deadly coronavirus crisis — despite a global vaccine rollout.
BoE policymakers voted to keep borrowing costs at a record-low 0.1 percent, after their first monetary policy meeting since Britain’s divorce from the European Union at the start of January.
The bank also cut its 2021 gross domestic product growth forecast to 5.0 percent from 7.25 percent, while hinting at the possibility of implementing negative interest rates later this year.
“Covid-19 vaccination programmes are under way in a number of countries, including the United Kingdom, which has improved the economic outlook,” the BoE said.
“Nevertheless, recent UK and global activity has been affected by an increase in Covid cases, including from newly identified strains of the virus, and the associated reimposition of restrictions.”
Much of the UK re-entered lockdown in early January to curb variant strains that are deemed more transmissible, with restrictions similar to initial Covid curbs imposed in the second quarter of 2020.
However, more than 10 million people in the UK have now received a first dose of a Covid-19 vaccine.
The BoE meanwhile noted Thursday that Britain and the European Union reached a trade agreement that has applied since January 1, averting a chaotic no-deal Brexit.
And it signalled that Britain would likely avoid a double-dip recession with marginal growth expected in the final three months of last year.
– Negative rates eyed –
The BoE also declared Thursday that it was “appropriate” to start preparations for the potential introduction of negative interest rates in six months’ time.
A negative interest rate would likely see retail banks further cutting their own borrowing costs, which would be unwelcome news for savers but a boost for borrowers.
The radical policy — which has already been employed by the Bank of Japan and the European Central Bank — has been under consideration for some time in Britain.
“Commercial banks need at least six months to prepare for negative rates and the central bank has now put them on notice, potentially paving the way for negative interest rates from August,” noted AJ Bell analyst Laith Khalaf.
“It’s likely markets will take this as a negative sign for longer term UK interest rate policy, even if it is designed simply to cover all bases as the pandemic continues to elevate economic uncertainty.”
The BoE said that the economy was about eight percent smaller in the fourth quarter than before the pandemic began in early 2020.
It expects gross domestic product to shrink by about four percent in the first quarter of this year, reversing a forecast for growth.
In response to the pandemic, the BoE and UK government have pumped billions of pounds into the British economy to stimulate growth and protect jobs.
The central bank added Thursday that it had maintained its quantitative easing stimulus programme at £895 billion ($1.2 trillion, 1.0 trillion euros).
The government has so far spent about £300 billion in emergency measures to combat economic fallout, including a costly subsidy for private sector wages.