The monetary policy committee (MPC) for the central bank for the United Kingdom unanimously left its Bank Rate steady at 0.1 percent for the third time since since cutting it twice in March at the height of the COVID-19 crises by a total of 65 basis points.
But the MPC increased its target for purchases of UK government bonds by another 150 billion pounds, its third increase this year after boosting it in June and March.
The BOE initially launched its asset purchase program, known as quantitative easing, in the depth of the Global Financial Crises in March 2009, and the target for total stock of bond purchases has now ballooned to 875 billion pounds from 200 billion in November 2009.
"The Committee will keep the asset purchase programme under review," the BOE said, adding "if the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit" - tweaking to its guidance from September when it said it was "ready to adjust monetary policy according to its remit."
The BOE reiterated that it "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."
While the BOE boosted its purchases of UK government bonds, it maintained its target for purchasing non-financial investment-grade corporate bonds, that is financed by issuing central bank reserves, at 20 billion pounds.
"The outlook for the economy remains unusually uncertain," the policy makers said, noting the rapid rise in COVID-19 cases that has led to new lockdown measures and an extension of the government's furlough program until March 2021.
On top of the pandemic, the UK economy is also struggling to adapt to life outside the European Union (EU) and BOE expects trade and economic activity to be affected as businesses adapts to new arrangements, especially in the first half of next year.
The new measures to control COVID-19 are expected to weigh on consumer spending, which is already softening, and BOE now expects gross domestic product to shrink by 11 percent in the fourth quarter of this year, much deeper than it's August forecast of an 5.4 percent contraction.
As restrictions related to the virus are expected to loosen, household spending should pick up in the first quarter of 2021, with GDP expanding 11 percent by the fourth quarter of 2021 as compared with its earlier forecast of a 6.2 percent rise.
For 2020 BOE sees the UK economy shrinking 11 percent, up from the August forecast of a 9.5 percent decline as business investment, exports, housing investment and household consumption plunge.
Next year the UK economy is seen bouncing back and grow 7.25 percent, down from its previous forecast of a 9 percent rise. In 2022 GDP should expand another 6.25 percent and 1.75 percent in 2023.
Inflation is expected to remain subdued this year, with consumer prices only rising 0.5 percent on average but then in 2021 and 2022 inflation is seen hitting the BOE's 2.0 percent target.
The Bank of England issued the following press release:
"The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. In that context, its challenge at present is to respond to the economic and financial impact of the Covid pandemic. At its meeting ending on 4 November 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion. The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.
Since the Committee’s previous meeting, there has been a rapid rise in rates of Covid infection. The UK Government and devolved administrations have responded by increasing the severity of Covid restrictions. All restrictions announced up to and including 31 October have been reflected in the Committee’s judgements.
There are signs that consumer spending has softened across a range of high-frequency indicators, while investment intentions have remained weak. The Committee’s latest projections for activity and inflation are set out in the accompanying November Monetary Policy Report. These assume that developments related to Covid will weigh on near-term spending to a greater extent than projected in the August Report, leading to a decline in GDP in 2020 Q4.
Household spending and GDP are expected to pick up in 2021 Q1, as restrictions loosen. The level of activity in the first quarter is expected to remain materially lower than in 2019 Q4. UK trade and GDP are also likely to be affected during an initial period of adjustment, over the first half of next year, as the United Kingdom leaves the Single Market and Customs Union on 1 January and is assumed to move immediately to a free trade agreement with the European Union.
Over the remainder of the forecast period, GDP is projected to recover further as the direct impact of Covid on the economy is assumed to wane. Activity is also supported by the substantial fiscal policies already announced and accommodative monetary policy. The recovery takes time, however, and the risks around the GDP projection are judged to be skewed to the downside.
The fall in activity over 2020 has reflected a decline in both demand and supply. Overall, there is judged to be a material amount of spare capacity in the economy. The LFS unemployment rate rose to 4.5% in the three months to August, but it is likely that labour market slack has increased by more than implied by this measure. The extended Coronavirus Job Retention Scheme and new Job Support Scheme will mitigate significantly the impact of weaker economic activity on the labour market. The unemployment rate is expected to peak at around 7¾% in 2021 Q2. Beyond that point, spare capacity is expected to be eroded as activity picks up, and a small degree of excess demand emerges over the second half of the forecast period.
Twelve-month CPI inflation increased to 0.5% in September, but remained well below the MPC’s 2% target, largely reflecting the direct and indirect effects of Covid on the economy. These include the temporary impact of lower energy prices and the reduction in VAT, as well as some downward pressure from spare capacity. CPI inflation is expected to remain at, or just above, ½% during most of the winter, before rising quite sharply towards the target as the effects of lower energy prices and VAT dissipate. In the central projection, conditioned on prevailing asset prices, inflation is projected to be 2% in two years’ time.
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. It also depends on the responses of households, businesses and financial markets to these developments.
At this meeting, the MPC judges that a further easing of monetary policy is warranted. The Committee agreed to increase the target stock of purchased UK government bonds by an additional £150 billion in order to meet the inflation target in the medium term, taking the total stock of government bond purchases to £875 billion. The Committee will keep the asset purchase programme under review.
The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit. 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."
Since the Committee’s previous meeting, there has been a rapid rise in rates of Covid infection. The UK Government and devolved administrations have responded by increasing the severity of Covid restrictions. All restrictions announced up to and including 31 October have been reflected in the Committee’s judgements.
There are signs that consumer spending has softened across a range of high-frequency indicators, while investment intentions have remained weak. The Committee’s latest projections for activity and inflation are set out in the accompanying November Monetary Policy Report. These assume that developments related to Covid will weigh on near-term spending to a greater extent than projected in the August Report, leading to a decline in GDP in 2020 Q4.
Household spending and GDP are expected to pick up in 2021 Q1, as restrictions loosen. The level of activity in the first quarter is expected to remain materially lower than in 2019 Q4. UK trade and GDP are also likely to be affected during an initial period of adjustment, over the first half of next year, as the United Kingdom leaves the Single Market and Customs Union on 1 January and is assumed to move immediately to a free trade agreement with the European Union.
Over the remainder of the forecast period, GDP is projected to recover further as the direct impact of Covid on the economy is assumed to wane. Activity is also supported by the substantial fiscal policies already announced and accommodative monetary policy. The recovery takes time, however, and the risks around the GDP projection are judged to be skewed to the downside.
The fall in activity over 2020 has reflected a decline in both demand and supply. Overall, there is judged to be a material amount of spare capacity in the economy. The LFS unemployment rate rose to 4.5% in the three months to August, but it is likely that labour market slack has increased by more than implied by this measure. The extended Coronavirus Job Retention Scheme and new Job Support Scheme will mitigate significantly the impact of weaker economic activity on the labour market. The unemployment rate is expected to peak at around 7¾% in 2021 Q2. Beyond that point, spare capacity is expected to be eroded as activity picks up, and a small degree of excess demand emerges over the second half of the forecast period.
Twelve-month CPI inflation increased to 0.5% in September, but remained well below the MPC’s 2% target, largely reflecting the direct and indirect effects of Covid on the economy. These include the temporary impact of lower energy prices and the reduction in VAT, as well as some downward pressure from spare capacity. CPI inflation is expected to remain at, or just above, ½% during most of the winter, before rising quite sharply towards the target as the effects of lower energy prices and VAT dissipate. In the central projection, conditioned on prevailing asset prices, inflation is projected to be 2% in two years’ time.
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. It also depends on the responses of households, businesses and financial markets to these developments.
At this meeting, the MPC judges that a further easing of monetary policy is warranted. The Committee agreed to increase the target stock of purchased UK government bonds by an additional £150 billion in order to meet the inflation target in the medium term, taking the total stock of government bond purchases to £875 billion. The Committee will keep the asset purchase programme under review.
The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit. 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."
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