— Forecasts Q4 GDP Contraction Raises Speculation Negative Rates in 2021
By Laurie Laird
LONDON (MaceNews) – The Bank of England Thursday expanded its bond-buying programme but left its benchmark interest rate unchanged at its latest policy meeting, acknowledging the downside risks to forecasts as a second wave of coronavirus grips the country.
The Bank increased the stock of purchases by a larger-than-expected £150 billion, taking the total programme to £875 billion. The pace of purchases could vary, according to minutes of the Monetary Policy Committee meeting on Wednesday, with activity like to “remain at or around its current level initially. with flexibility to slow the pace of purchases later.” Most UK forecasters expected a smaller £100 billion increase in asset purchases.
The decision was announced on the day that England entered a national lockdown, aimed at slowing the transmission of Covid-19. The measures are less stringent than those imposed over the spring, with schools remaining open.
MPC members agreed unanimously to expand the Bank’s quantitative easing programme and also agreed to to leave the BoE’s benchmark rate at a record-low of 0.1%. But a sharp downward revision to the BoE’s economic forecasts did little to dampen speculation of a rate cut in the months to come.
Bank staff now expect that gross domestic product contracted by 2% in the final three months of the year, some six percentage points weaker than expected back in August. Output fell to 9% below levels maintained at the end of last year, and is expected to have remained at that level through the third quarter. GDP for July-to-September period are scheduled for release on 12 November. MPC members acknowledged the downside risks to forecasts, noting that “the outlook for the economy remains unusually uncertain.”
Bank of England Governor Andrew Bailey has admitted that negative interest rates are under consideration, and the Bank has asked banks to report on the ability of technical systems to handle assets bearing sub-zero rates. There was little discussion of negative rates in the MPC minutes or the Bank’s quarterly Monetary Policy Report, both released on Thursday.
Bailey was reluctant to be drawn on the Bank’s current thinking of sub-zero rates following Wednesday’s meeting, telling CNBC that the MPC “didn’t have anything to say” on negative rates while a policy review continues.
BoE staff have predicated their forecasts on the “assumption that there is an immediate move to a free trade agreement with the European Union” by year end. However intense talks in both London and Brussels over the past two weeks have yet to yield a deal, with negotiations stalled over the state aid for industry and the allocation of fishing rights in British territorial waters.
The MPC also lifted its unemployment forecast. Jobless is expected to peak at 7.75% in the second quarter of next year, up from there previous forecast of 7.5% at year end. Unemployment rose to 4.5% in the three months to August, but the MPC believes that reading may underestimate the degree of slack in the labour force.
The UK’s chief financial official, Chancellor of the Exchequer Rishi Sunak, was forced to extend the government’s job support scheme for the duration of the current four-week lockdown, reversing an earlier plan to scale back a programme that covers 80% of the wages of furloughed workers. Sunak is due to brief parliament at approximately 12:30 GMT on Thursday.
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Contact this reporter: laurie@macenews.com.
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