—MPC Hints at Symmetric Stance on Inflation Target, Willing to ‘Tolerate’ Inflation Overshoot
By Laurie Laird
LONDON (MaceNews) – The Bank of England left its main policy tools on hold after its latest rate-setting meeting on Wednesday, but extended the time frame of its supplemental lending scheme and hinted at a more symmetrical approach to meeting its inflation target in the event of a messy divorce from the European Union.
The Bank’s Monetary Policy Committee left its main interest rate at a record low of 0.1% and made no reference to the possibility of negative interest rates in minutes of it latest deliberations, released on Thursday. The Bank has been conducting a review of the efficacy of sub-zero rates in the UK over the past several months. The MPC also maintained its quantitative easing programmes at total of £895 billion, after increasing the size of the package at its November meeting. Members agreed unanimously to both decisions.
The MPC did extend its Term Funding Scheme for Small and Medium-Sized Enterprises for six months, until the end of October 2021. Earlier this month, external MPC member Michael Saunders, a noted dove, suggested that the programme could eventually lend at below zero rates, replicating the effective of the European Central Bank’s Targeted Long Term Refinancing Operations, which provide conditional financing to banks at a rate of -1.0%. However, Saunders stressed that he was speaking in a personal capacity.
The Bank also hinted a shift toward a more symmetrical inflation target, noting that the MPC “has increased tolerance” for a “temporary overshoot in inflation” in the event of a no-deal Brexit. The UK is due to leave its transitional arrangement with the EU on 31 December, and negotiators have yet to agree a permanent deal, although both sides have sounded more optimistic about the possibility of a pact over recent days.
But should a deal prove elusive, sterling could fall sharply, lifting CPI and weakening GDP growth, according to the minutes. Consumer price inflation fell to 0.3% in November and has hovered below the Bank’s 2.0% target for the past 16 months.
While Brexit weighs on the medium-term outlook, the MPC admitted that short-term forecast “remains unusually uncertain,” due to the evolution of Covid. Much of UK commerce was locked down in November, while many regions of the county, including London, have shifted to heavily-restricted conditions that will extend through December, more stringent than the Bank anticipated back in November. The MPC now believes that GDP will contract by “a little over 1% [in the fourth quarter] taking it to 11% below its level in 2019 Q4.”
MPC members also discussed the reasons for the UK’s poor economic performance when compared to other developed nations through the Covid crisis, attributing some of the relative weakness to “difference in the measurement of health and education services across countries.” However, the MPC did recognise that UK “household spending on social activities … had fallen to a greater extent than elsewhere.”
At the end of the third quarter, UK stood 9.7% below its level at the end of 2019. US GDP had recovered to 3.5% below late-2019 levels, while eurozone output was 4.4% lower. Updated third quarter UK data are due on 22 December.
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Contact this reporter: laurie@macenews.com.
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