Base rate unchanged with fallout from Brexit likely to dictate next step

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The Bank of England has kept its base rate at an all-time low of 0.1 percent, warning that the Covid-19 effect leaves the outlook for the economy “unusually uncertain”.

The bank’s Monetary Policy Committee (MPC) voted unanimously to keep rates at their lowest in history, despite further speculation about the introduction of negative rates.

He also voted to maintain his quantitative easing process, with a total stock of asset purchases standing at £ 895 billion.

The meeting report noted that the deployment of the Covid-19 vaccine is likely to reduce downside risks to the economic outlook.

But given the increase in coronavirus cases, global activity has been affected due to lockdown restrictions and UK GDP growth in Q4 2020 “is expected to be a bit weaker than expected at the time of the November report. “.

The minutes read: “The UK’s short-term outlook has evolved broadly in line with the Committee’s expectations in the November report.

“UK GDP grew 0.4% in October, leaving it 8% below its fourth quarter 2019 level. Activity has been stronger than expected, despite recent surge in Covid cases -19 and the associated interlocks.

“Nonetheless, the activity restrictions introduced after these lockdowns were more stringent than the committee assumed in its November forecast, and should weigh more heavily on activity in the first quarter of 2021.”

He noted that the successful deployment of vaccines should support the phasing out of restrictions and the rebound in activity that was assumed in the November report, although it was less clear how this would affect households’ immediate economic behavior and enterprises.

He added: “The outlook for the economy remains unusually uncertain.

“It depends on the evolution of the pandemic and the measures taken to protect public health, as well as the nature and the transition to the new trade agreements between the European Union and the United Kingdom.

“The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress has been made to eliminate slack and sustainably meet the inflation target. by 2%. ”

Bank could act to support Brexit fallout

Santander UK chief economist Frances Haque noted that the decision to leave the rate unchanged was awaited as discussions on a possible trade deal with the EU continued.

“However, if trade talks end without a deal, the Bank of England stands ready to step in with support that may take the form of a combination of measures designed to support financial markets and the UK economy,” a- she declared.

“If necessary, the Bank of England could enact them before its next meeting in February of next year.

“If a deal is reached, the Bank of England will continue to monitor the progress of the UK economy and, if necessary, for example if a new full foreclosure ensues, could provide additional support.”

One in four chance of cutting rates in 2021

Laith Khalaf, financial analyst at AJ Bell, agreed that the central bank would not make its next move until it knew which direction Brexit was heading.

“In the event of no deal, he would probably be willing to deal with the temporary rise in inflation due to the weakness of the pound sterling and the imposition of tariffs, but he could not condone it. economic impact of a disorder. Brexit, ”he said.

“The governor of the bank said no deal would have a greater long-term economic effect than the pandemic, so we can expect further stimulus if Brexit negotiations fail, that either in the form of more QE or cuts in interest rates.

“On this last point, the bank is already flirting with its effective lower bound, and there has been a chorus of moans from the big banks about the prospect of negative rates.

He added that despite the boost in confidence in vaccines, markets are assessing a one in four chance of a rate cut in 2021, which would leave rates at or below zero.

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