Bank Of England Boost Stimulus, Cuts Outlook

The Bank of England expanded its bond purchase programme by a bigger-than-expected GBP 150 billion and retained its record low interest rate to help the economy to withstand the challenges posed by the second wave of coronavirus infections.

The bank downgraded its economic outlook as the country entered a second lockdown amid the rising Covid-19 cases and the economy is forecast to return to pre-crisis levels only in early 2022.

In a unanimous vote, the rate-setting body decided to raise the size of the asset purchase programme to GBP 895 billion from GBP 745 billion. Economists were expecting an expansion of GBP 100 billion. The bank also maintained its corporate bond purchases at GBP 20 billion.

The additional bond purchases will start in January and complete by around the end of 2021.

The Monetary Policy Committee, headed by Governor Andrew Bailey, also unanimously voted to hold the interest rate at 0.10 percent. The bank had altogether reduced the rate by 65 basis points at two unscheduled meetings in March.

The BoE had hinted about negative interest rates earlier and asked banks about their preparedness.

But what the markets really want to know is whether there will be a shift to negative interest rates in 2021 – and for the time being, the Bank is offering no fresh hints, James Smith, an ING economist, said.

Ruth Gregory, an economist at Capital Economics, said the MPC will shun negative interest rate for the next 6-12 months and instead expand quantitative easing by at least another GBP 100 billion in 2021.

Policymakers said they stand ready to take further actions if necessary to help the economy recover and ensure that inflation returns to the 2 percent target.

The committee repeated its guidance 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 percent inflation target sustainably.

Consumer price inflation is expected to remain at, or just above 0.5 percent during most of the winter, before rising quite sharply towards the target as the effects of lower energy prices and value added tax dissipate. Inflation is projected to be 2 percent in two years’ time.

Due to the reimposition of social distancing measures, the bank expects overall GDP to fall by around 2 percent in the fourth quarter of 2020 after rebounding by an estimated 16.1 percent in the third quarter, the monetary policy report showed.

GDP is forecast to grow 7.25 percent in 2021, which was revised down from 9 percent projected in August. However, the outlook for 2022 was revised up to 6.25 percent from 3.50 percent.

In the fourth quarter of this year, the jobless rate is projected to climb to around 6.3 percent. The unemployment rate is expected to peak at around 7.75 percent in the second quarter of 2021.

According to the bank, about 5.5 million employees were furloughed in November.

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