The Bank of England has announced a further £150m in quantitative easing to support the UK economy as Covid infection rates and deaths continue to rise, although it will not be making use of negative rates at this time.
The Bank’s Monetary Policy Committee approved £150bn in additional UK government bond purchases but did not move towards negative interest rates, maintaining the current level of 0.1 per cent.
This comes ahead of an announcement in Parliament by chancellor Rishi Sunak of further fiscal measures to support the UK economy as lockdown conditions are enacted.
“Since the committee’s previous meeting, there has been a rapid rise in rates of Covid infection,” the Bank noted. “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.”
The Bank reported signs that consumer spending had softened and investment intentions remain weak. Furthermore, developments related to Covid are likely to weigh more heavily on near-term spending than had previously been anticipated, leading to a decline in GDP for Q4, with an 11 per cent contraction of the economy forecasted.
“Household spending and GDP are expected to pick up in 2021 Q1, as restrictions loosen,” it noted. “The level of activity in the first quarter is expected to remain materially lower than in 2019 Q4.”
In addition, trade and economic growth are likely to be affected by an initial period of adjustment following Brexit during the first half of next year, assuming that the UK moves immediately to a free-trade agreement with the EU.
While the direct impact of Covid should begin to wane, the economic recovery will take time and the Monetary Policy Committee’s projections are judged to be “skewed to the downside”.
Unemployment is likely to peak at 7.75 per cent in Q2 2021, up from 4.5 per cent at the end of August, while inflation is expected to remain around 0.5 per cent during most of the winter before rising to target levels – 2 per cent – in two years’ time.
Nevertheless, the Bank said it would continue to monitor the situation closely and if the outlook for inflation weakens, it “stands ready to take whatever additional action is necessary”. However, policy will not be tightened until there is clear evidence that significant progress has been made in eliminating spare capacity and achieving the target rate sustainably.
Ambrose Crofton, global market strategist at JP Morgan Asset Management, said the announcement of greater-than-expected asset purchases showed that the Bank is committed to supporting the government in its response to the pandemic.
“An extraordinary economic shock warrants an extraordinary policy response,” he said. “The resurgence of the virus in recent months will mean both the government and companies are once again turning to global capital markets to borrow large sums.
“The Bank’s purchases in these markets will help prevent borrowing costs rising. The absence of support would likely rise, leading to an undesirable deflationary cycle. The action taken today is in our view entirely consistent with its inflation mandate.”
However, David Page, head of macro research at AXA Investment Managers, voiced concerns about the GDP outlook.
“The Bank considers the risks to its GDP outlook to be skewed to the downside. So do we,” he said. “While material uncertainty surrounds the impact of the latest round of lockdown, we consider the likelihood of a somewhat sharper drop in Q4.
“We are also less convinced about the scale of rebound in Q1, pencilling in a cautious rebound in Q1, including an adverse effect on UK GDP growth from the shift out of the EU-exit transition phase.”
While there had been talk of negative interest rates, Aberdeen Standard Investments’ Luke Bartholomew said this is premature.
“The Bank has shown it is not yet ready to take rates negative given operational considerations, and that it doesn’t really believe this is the appropriate economic backdrop to get the maximum possible stimulus from negative rates,” the economist noted.