Press release

7 May 2020 London, GB

Bank of England holds off from further stimulative action – EY ITEM Club comments

The Bank of England held off from enacting any further stimulus at the May meeting of the Monetary Policy Committee (MPC). There was a unanimous 9-0 vote to keep interest rates at 0.10%.

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  • As largely expected, no new policy moves from the Bank of England at the May Monetary Policy Committee (MPC meeting).
  • However, the Bank of England made it clear that it is ready and willing to take further supportive measures should economic circumstances or financial market conditions warrant.
  • For the seven members that voted for no change in asset purchases, the minutes observed that “the prospective weakness in employment and inflation, and downside risks around aspects of the medium-term outlook, might necessitate further monetary policy action to support the economy in the future.”
  • The Bank of England’s “plausible illustrative economic scenario” suggested that further stimulus could well be needed. It saw GDP contracting around 25% quarter-on-quarter in the second quarter with the unemployment rate getting up to 9.0%. Although the economy is seen recovering relatively rapidly, GDP is still seen contracting 14% over 2020 before growing 15% in 2021. The Bank of England considers the risks to this outlook to be to the downside.
  • The EY ITEM Club believes future Bank of England stimulus is very possible on 18 June after the next MPC meeting, given that the £200 billion of QE that it announced in March is likely to be used up by early July.
  • This would most likely be in the form of more asset purchases. With the Treasury issuing a large amount of gilts (it announced on 23 April, it would issue £180 billion between May and July), the Bank of England is likely to want give the markets the confidence that they can be digested.
  • EY ITEM Club thinks it is unlikely that the Bank of England will take interest rates any lower than 0.10%.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

As largely expected, the Bank of England held off from enacting any further stimulus at the May meeting of the Monetary Policy Committee (MPC). There was a unanimous 9-0 vote to keep interest rates at 0.10%. In addition, there was a 7-2 vote to continue with the programme of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to take the total stock of these purchases to £645 billion.

There was never any doubt that the MPC would keep interest rates at the record low level of 0.10%. The Bank of England has regularly indicated that it sees the lower bound for interest rates as close to, but just above zero.

However, there had been some expectations that the Bank of England could announce further asset purchases as soon as the May meeting. The MPC noted that the additional asset purchases it had been undertaking had helped to improve liquidity and reduce interest rates in the gilt market. Gilt yields across all maturities were lower than the levels seen in mid-March.

While the MPC sat tight at their May meeting, the committee made it clear that they are ready and willing to take further supportive measures should economic circumstances or financial market conditions warrant.

With respect to the seven MPC members that voted for unchanged asset purchases at the meeting, the minutes concluded that “a majority of MPC members judged that the existing stance of monetary policy was appropriate. The existing programme of asset purchases was not yet complete. More information on a number of important assumptions underpinning the scenario analysis, and so determining the economic outlook, was likely to become available over the coming weeks. There was value in waiting for that information.

Significantly though, the minutes went on to state “for all members of this group, the prospective weakness in employment and inflation, and downside risks around aspects of the medium-term outlook, might necessitate further monetary policy action to support the economy in the future.

Furthermore, two members believed that economic and financial conditions warranted further asset purchases now and favoured a £100 billion increase.

Bank of England takes cautious view of economy

In the minutes, the MPC considered that the timeliest indicators of UK demand have generally stabilised at very low levels in recent weeks after very sharp falls during late March and early April. They observed that their Decision Maker Panel indicated that companies’ sales are expected to be around 45% lower than normal in the second quarter and business investment about 50% lower. While the MPC noted that there had been widespread take up of the Coronavirus Job Retention Scheme, they regarded the sharp increase in benefit claims as consistent with a “pronounced” rise in unemployment.

The Bank of England acknowledged that the outlook for the UK economy is currently unusually uncertain given it is unknown how the Coronavirus pandemic will develop and how governments, businesses and households respond to it.

In the Monetary Policy Report, the Bank of England outlined a “plausible illustrative economic scenario”. Under this scenario, the Bank of England sees UK GDP falling 14% in 2020 then rebounding 15% in 2021.

It sees a very sharp drop in GDP in the first half of 2020 with a substantial increase in unemployment, in addition to the workers being furloughed. The Bank of England estimates that GDP contracted around 3% quarter-on-quarter in the first quarter and its scenario sees a 25% quarter-on-quarter drop in GDP in the second quarter with the unemployment rate getting up to 9.0%.

Assuming a gradual relaxation of social distancing measures, the fall in GDP is expected to be temporary and activity is expected to pick up relatively rapidly, supported by very significant monetary and fiscal stimulus. Nevertheless, some caution among businesses and households is expected to persist, which extends the time that the economy takes to return to its previous path. Under this scenario, inflation falls under 1% in the near term, but returns to around its 2% target further out.

The Bank of England considers the balance of risks to this scenario are to the downside. In particular, there is the risk that cautious business and consumer behaviour could last for longer. Productivity could also be adversely affected by developments and be weaker than assumed over the medium term.