Bank of England unanimously keeps interest rates on hold at 0.10% as rate-setting committee expresses that Covid-19 will deliver a bigger hit to UK economy than forecast
December 2020
By Georgia Boddy
At its December 2020 meeting, the Monetary Policy Committee (MPC) voted unanimously to hold the bank rate at 0.10% after warning that rapid growth in coronavirus infections will deliver a bigger hit to the UK economy than expected. The MPC also voted unanimously to maintain the Bank of England’s bond-buying programme unchanged at £895 billion following the additional £150 billion injection into the economy last month.
Subsequent to a second wave of the pandemic, the government’s regional tiered approach as an attempt to control the virus, coupled with tougher controls in Scotland, Wales and Northern Ireland, has put the economy under further unprecedented pressure that will see UK growth weaker than expected well into the first quarter of 2021. It is now expected by the MPC that GDP is to contract by a little over 1% in the final three months of the year, which thereby means national output for 2020 would be 11% below that of 2019, marking the biggest recession in 300 years.
On a more positive note, good news has arrived in the form of the successful trialling of the forthcoming Covid vaccines which are planned to be rolled out widely over the first half of 2021. This is likely to reduce the downside risks to the economic outlook from Covid previously identified by the MPC in their November Report. Commentators are suggesting positive economic benefits from a successful vaccination programme, and the government has outlined its intent to begin with the most vulnerable in society in order to reduce the burden and impact on health services.
Due to the government’s employment support schemes throughout the pandemic, such as the furlough scheme, developments in the labour market remain difficult to interpret. Despite the unemployment rate rising to 4.9% in the three months to October, other indicators suggest that labour market slack has increased more than implied by this measure.
However, with limited time remaining for a deal to be made between the UK and the EU before the end of the transition on 31st December 2020, the outlook for the UK economy remains ‘unusually uncertain’ but the MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the committee has said they will stand ready to take whatever additional action is necessary to achieve its remit.