Rising virus rates threaten economy, Bank says

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The Bank of England kept interest rates at 0.1%, citing a lack of clarity on the UK’s future trade relationship with the EU and the trajectory of the coronavirus pandemic as cause for concern.

The recent increase in the rate of Covid-19 cases could “weigh more on activity,” the Bank said.

The economy has recovered much of the production lost since the lockdown.

However, the outlook remained “unusually uncertain,” the bank said.

The Bank will continue to provide monetary support to the economy, but it stopped before increasing its bond buying program or further reducing interest rates.

The Monetary Policy Committee (MPC), which sets interest rate policy, said previous projections of economic recovery were “on the assumption of an immediate and orderly transition to a comprehensive free trade agreement with the European Union on January 1, 2021 ”.

Economic recovery will also depend on how the pandemic evolves and what steps are taken to protect public health, the MPC said.

Negative rates

The Bank of England said that despite a stronger than expected recovery in recent months, the economy was still around 7% smaller than at the end of last year.

Usually, if the economy is not growing enough, the Bank of England will consider lowering interest rates to encourage businesses to invest and savers to spend.

However, interest rates are already close to zero after two emergency cuts in March.

The minutes of this month’s meeting show that the MPC discussed the use of negative interest rates to stimulate the economy. Bank Governor Andrew Bailey appeared to rule this out last month, although he said negative interest rates remained in the “toolbox”.

  • What are negative interest rates?
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The Bank has also indicated that it does not intend to hike interest rates until “significant progress” is made in bringing inflation back to the Bank’s 2% target. . It is currently at its five-year low of 0.2%.

The Bank said it did not expect inflation to return to target levels for two years.

“We expect interest rates to not exceed 0.1% over the next five years,” said Andrew Wishart, UK economist at Capital Economics.

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