- As largely expected, the Bank of England announced more asset purchases at the June Monetary Policy Committee (MPC) meeting, but kept interest rates unchanged at 0.10%. The £100 billion extra asset purchases announced were in line with the consensus anticipated increase
- The decision to keep interest rates at 0.10% was the result of a unanimous 9-0 vote within the MPC. Notably, there was no mention in the minutes of the case for negative interest rates
- There was also a strong 8-1 majority vote in favour of the extra £100 billion of asset purchases
- The MPC is modestly more upbeat about the current state of the UK economy, and the global economy. The Committee observed that latest indicators suggested that UK economic activity had started to recover in May after GDP fell 20.4% month-on-month in April, and that the quarter-on-quarter fall in GDP in the second quarter was likely to be less than it had expected in its May Monetary Policy Report
- The EY ITEM Club says that today’s measures are unlikely to mark the end of Bank of England stimulus as it will likely believe that this has a further role to play in helping the economy build sustainable recovery amid likely still challenging and uncertain conditions. The EY ITEM Club expects the Bank of England to announce more asset purchases either at its September or November meetings, likely again to be around £100 billion
- However, the EY ITEM Club remains doubtful that the Bank of England will cut interest rates below the current level 0.10%
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“As largely expected, the Bank of England provided further stimulus to the economy through announcing a further £100 billion of asset purchases, which will take the total stock up to £745 billion. The £100 billion of asset purchases announced was in line with the consensus anticipated increase.
“Also in line with expectations, the Bank of England decided to leave interest rates unchanged at 0.10%. There was no reference in the June minutes to the case for negative interest rates.
“The decision to keep interest rates at 0.10% was the result of a unanimous 9-0 vote within the MPC. There was also a strong 8-1 majority vote in favour of the extra £100 billion of asset purchases.
“The minutes of the June MPC meeting concluded that “at this meeting, a majority of MPC members judged that a further easing of monetary policy was warranted to support the economy and thereby to meet the inflation target in the medium term. While recent demand and output data had not been quite as negative as expected, other indicators suggested greater risks around the potential for longer lasting damage to the economy from the pandemic.”
Howard Archer adds: “While the Governor and several MPC members have recently indicated that the Bank of England is actively reviewing the case for negative interest rates, it never looked likely that the MPC would opt to go down that route at their June meeting – if at all.
“It is likely that the Bank of England will fully spell out its thinking on negative interest rates on 6 August. This is when it will release the next quarterly edition of its Monetary Policy Report alongside the minutes of its MPC meeting as well as announcing its next set of decisions on monetary policy.
“The minutes of the June MPC meeting observed that the existing evidence suggests that the fall in UK GDP (and in global GDP) will be less severe than was anticipated in the May quarterly Monetary Policy. It noted that UK GDP had contracted around 20% in April and that evidence from more timely indicators suggested that GDP had started to recover thereafter. There were signs that consumer spending had picked up in May while the housing market had started to recover. Meanwhile, net trade could benefit from recovering global activity. Consequently, the MPC concluded: “overall, recent developments suggested that the level of GDP in the second quarter might be 20% below its level in the final quarter of 2019, rather than the 27% included in the May Report.”
Howard Archer adds: “The minutes also observed that UK financial conditions had been fairly stable since the previous MPC meeting, but had remained tighter than prior to the outbreak of COVID-19.
“However, the MPC clearly still has significant concerns and uncertainties about the recovery. Significantly, the minutes further observed “although stronger than expected, it is difficult to make a clear inference from that about the recovery thereafter”. The MPC observed that there is a risk of higher and more persistent unemployment, and also that consumer and business caution may persist despite relaxation of coronavirus-related restrictions on activity. Significantly, it observed that “evidence from business surveys and the Bank’s Agents was consistent with a weak outlook for employment in coming quarters. Some households were also worried about their job security.” The MPC also considered that it is unclear “to what extent consumers would be willing to return to shopping physically now that some Covid-related restrictions had started to be lifted. Forms of social expenditure were also likely to continue to be held back by social distancing, whether officially mandated or voluntary.”
Howard Archer adds: “Consequently, the MPC concluded that “the economy, and especially the labour market, will therefore take some time to recover towards its previous path.”
“On the inflation front, the MPC noted that consumer price inflation had fallen to 0.5% in May, which had required the Governor to write an explanatory letter to the Chancellor of the Exchequer. The MPC considered that inflation would fall slightly further in the near term, as the drag from the Covid-related shock built. The MPC then expects inflation to rise during 2021, as the direct impact of the recent fall in the oil price dropped out of the annual comparison and the downward pressure from domestic factors waned as demand recovered.”