Bank of Eng­land warns of 'un­usu­ally un­cer­tain' out­look


The Bank of Eng­land (BoE) an­nounced on Thurs­day, Septem­ber 17, that the Mon­e­tary Pol­icy Com­mit­tee (MPC) had voted unan­i­mously to leave its bench­mark bank rate at 0.1 per­cent whilst also main­tain­ing the tar­get for the to­tal stock of as­set pur­chases un­der its quan­ti­ta­tiveeas­ing (QE) pro­gramme at £745 bil­lion.

Ac­cord­ing to the BoE sum­mary, "At its meet­ing end­ing on 16 Septem­ber 2020, the MPC voted unan­i­mously to main­tain Bank Rate at 0.1%.

The Com­mit­tee voted unan­i­mously for the Bank of Eng­land to con­tinue with its ex­ist­ing pro­grammes of UK gov­ern­ment bond and ster­ling non-fi­nan­cial in­vest­ment-grade cor­po­rate bond pur­chases, fi­nanced by the is­suance of cen­tral bank re­serves, main­tain­ing the tar­get for the to­tal stock of these pur­chases at £745 bil­lion."

The Com­mit­tee did, how­ever, warn that the out­look for the econ­omy re­mains "un­usu­ally un­cer­tain", cit­ing the di­rect im­pact of COVID-19 on eco­nomic growth and the move to a com­pre­hen­sive free-trade agree­ment with the Euro­pean Union (EU) on Jan­uary 1, 2021, as be­ing key fac­tors over the com­ing months.

The BoE's Mon­e­tary Pol­icy Com­mit­tee sets mon­e­tary pol­icy to meet its 2-per­cent in­fla­tion tar­get as well as to sus­tain growth and em­ploy­ment.

But with in­fla­tion hav­ing fallen from 1.0 per­cent in July to 0.2 per­cent in Au­gust, due mainly to the UK Gov­ern­ment's Eat Out to Help Out Scheme and the cut in the Value Added Tax (VAT) for hos­pi­tal­ity, hol­i­day ac­com­mo­da­tion and at­trac­tions weigh­ing heav­ily on prices, there is now con­cern that the MPC's in­fla­tion tar­get will not be met for quite some time. In­deed, the Bank now pre­dicts that in­fla­tion will be around 2 per­cent in two years' time, con­di­tional on pre­vail­ing mar­ket yields.

And with many fore­cast­ing in­fla­tion to re­main be­low 1 per­cent un­til at least the end of the year, there could be grow­ing pres­sure for the rate-set­ting com­mit­tee to adopt an even more dovish stance.

In­deed, the low in­fla­tion rate prompted an ex­change of open let­ters be­tween Andrew Bai­ley, the BoE gov­er­nor, and Rishi Su­nak, the chan­cel­lor of the ex­che­quer, pub­lished by the Bank with its an­nounce­ment.

That said, the BoE did ac­knowl­edge that the UK econ­omy ap­pears to be in a stronger po­si­tion than it was a month ago.

"Re­cent do­mes­tic eco­nomic data have been a lit­tle stronger than the Com­mit­tee ex­pected at the time of the Au­gust Re­port, al­though, given the risks, it is un­clear how in­for­ma­tive they are about how the econ­omy will per­form fur­ther out," the Bank ob­served, adding that re­cent COVID- 19 cases still have the po­ten­tial to keep eco­nomic ac­tiv­ity sub­dued for some time, al­though per­haps not as in­tensely as was the case ear­lier this year.

Nonethe­less, the Bank warns that "there re­mains a risk of a more per­sis­tent pe­riod of el­e­vated un­em­ploy­ment than in the cen­tral pro­jec­tion", with it pre­dict­ing that the un­em­ploy­ment rate would reach 7.5 per­cent by the end of 2020.

And with po­ten­tial risks to the UK econ­omy aris­ing from a pos­si­ble no-deal Brexit, a resur­gence of coro­n­avirus cases in­duc­ing more re­stric­tive eco­nomic ac­tiv­ity and next month's end­ing of the gov­ern­ment's fur­lough scheme (which was pre­vent­ing

mon­e­tary-pol­icy mil­lions of work­ers from be­ing laid off), fur­ther mon­e­tary loos­en­ing could well be im­ple­mented over the next few months.

"The path of growth and in­fla­tion will de­pend 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 Bank said in its of­fi­cial state­ment. "It will also de­pend on the re­sponses of house­holds, busi­nesses and fi­nan­cial mar­kets to these de­vel­op­ments."

As such, the BoE has con­firmed that it will con­tinue to mon­i­tor the sit­u­a­tion closely and "stands ready to ad­just mon­e­tary pol­icy ac­cord­ingly to meet its remit". In­deed, min­utes from the MPC meet­ing on Septem­ber 16 show that it "had been briefed on the Bank of Eng­land's plans to ex­plore how a neg­a­tive Bank Rate could be im­ple­mented ef­fec­tively, should the out­look for in­fla­tion and out­put war­rant it at some point dur­ing this pe­riod of low equi­lib­rium rates."

The Bank also af­firmed that it will be­gin "struc­tured en­gage­ment on the op­er­a­tional con­sid­er­a­tions" in the fourth quar­ter.

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