Additional £150bn of monetary easing as Bank Rate is maintained at November meeting
November 2020
At their meeting ending 5th November 2020, the Bank of England’s Monetary Policy Committee (MPC) agreed unanimously for Bank Rate to be maintained at 0.10%. It was judged for quantitative easing to be increased by £150 billion due to the economic implications following Covid restrictions enacted in response to a rapid rise in Covid infection rates, taking the total stock of government bond purchases to £875 billion.
In a healthcheck of the UK economy, the MPC noted that consumer spending has softened with investment intentions remaining weak as uncertainty in the market continued. The assumptions forecast a near-term impact that eases over the course of the next eighteen months as the direct impact of Covid is expected to lessen as normal market activity resumes following the vaccination programme expected in late 2020 and early 2021. In addition to the economic shock from Covid, UK trade and GDP are also expected to be impacted as the UK official leaves the Single Market and Customs Union on 1st January 2021 with an assumption that the UK moves immediately to a free trade agreement with the European Union.
The fall in UK trade and GDP over 2020 has been the result of a decline in both demand and supply with an unusual double shock experienced earlier this year. The MPC judge there to be a material amount of spare capacity, with unemployment rising to 4.5% in the three months to August albeit there is likely to be additional slack in this figure as the Coronavirus Job Retention Scheme and the new Job Support Scheme has softened the true impact. The committee judge that unemployment will peak at 7.75% in Q2 of 2021 as the support measures are withdrawn, with a reduction in unemployment over the course of 2021 as the economy gradually picks back up.
Inflation remains below the 2.0% targeted level reported at 0.5% in September, explained as a direct result of the effects of Covid on the UK economy. Factors such as temporarily lower energy prices and a reduction in VAT have also been highlighted as contributing factors. Inflation is expected to remain low over the winter months while a sharp rise is forecast as lower energy prices and VAT levels dissipate. The MPC judge that inflation will not reach its 2.0% target until 2022.
The outlook for the UK remains uncertain and the committee highlighted the dependence upon both the pathway for Covid including the measures judged necessary by government to protect public health and the transition to the new trading arrangements between the UK and the European Union. Of course the response of households, businesses and the financial market to both will in part determine the speed and pathway to recovery.
The MPC will publish their next minutes on 17th December 2020 for the final meeting of the year. They will continue to judge the latest situation and data with an expectation for loose monetary policy until such time that spare capacity is minimised and the 2.0% inflation target is sustainably reached.