- The Bank of England fully matched expectations at the September Monetary Policy Committee (MPC) meeting with unanimous 9-0 votes both for keeping interest rates at 0.10% and the planned stock of asset purchases unchanged at £745bn
- The MPC came across as being very much in ‘wait and see’ mode and willing to act on future stimulus if, and as soon as, necessary. This was reflected in its view that the outlook for the UK economy “remains unusually uncertain”
- While the MPC considered the economy’s recent performance had been stronger than expected with likely higher growth in Q3, this was countered by concerns over the downside risks to the economy stemming primarily from increased coronavirus cases and the possibility of continually high unemployment. The MPC is also keeping an eye on developments regarding the future trading relationship of the UK and EU
- The EY ITEM Club believes the MPC will come to the view before the end of the year that further Bank of England stimulus is warranted to bolster the UK’s recovery. It expects the Bank of England to announce further asset purchases, most likely at the November or December MPC meetings, in the region of £100bn. This would take the total purchases up to £845bn
- The EY ITEM Club remains doubtful that the Bank of England will cut interest rates below 0.10%, despite the fact that the Bank continues to review the case for negative interest rates
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“Totally as expected, the September meeting of the Bank of England’s Monetary Policy Committee (MPC) resulted in unchanged interest rates of 0.10% and an unchanged £745 billion target for the stock of asset purchases.
“Equally unsurprising was the unanimous 9-0 MPC votes for both unchanged outcomes.
“The MPC came across as being very much in ‘wait and see’ mode and willing to act on future stimulus if, and as soon as, necessary. This reflected its view that the outlook for the UK economy “remains unusually uncertain”.
“The MPC considered that the recent performance of the economy has been modestly stronger than expected in August, primarily due to the strength of consumer spending. However, the MPC seemed unconvinced that this necessarily boded well for the economy’s performance further out and the members seemed wary of the downside risks to the recovery, stemming from rising coronavirus cases and the possibility of persistently high unemployment.
“It is also notable that while the MPC did not say anything about the latest developments in the UK-EU negotiations on their future relationship, the minutes commented that: “The MPC’s latest central projections were also conditioned on the assumption of an immediate, orderly move to a comprehensive free trade agreement with the European Union on 1 January 2021. The Committee would consider economic issues relating to Brexit within the context of its wider forecast discussions ahead of the November MPC meeting.” The minutes also noted that just under half of respondents in their Decision Maker Panel had ranked Brexit as one of the top three sources of uncertainty for their business.
“The minutes also observed that “for 2020 Q3 as a whole, Bank staff expect GDP to be around 7% below its 2019 Q4 level, less weak than had been expected in the August Report.” In particular, the MPC noted that consumer spending has continued to recover strongly and has recently been doing better than was expected in its August report. However, investment intentions remain weak and the uncertainties facing businesses elevated. Additionally, the MPC observed that the number of furloughed workers has continued to decline but uncertainty remains around the labour market after the government job support schemes unwind.
Door wide open for additional further stimulus
Howard Archer continues: “The conclusions of the September MPC meeting made it very clear that the door is open to further Bank of England stimulus, with the minutes stating “the Committee would continue to monitor the situation closely and stood ready to adjust monetary policy accordingly to meet its remit. The MPC would keep under review the range of actions that could be taken to deliver its objectives. The Committee will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit. The MPC will keep under review the range of actions that could be taken to deliver its objectives.”
“The MPC also indicated that any tightening of monetary policy was some considerable way off as it also commented: “The Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.””
Bank of England likely to deliver further asset purchases later this year but is unlikely to cut interest rates
Howard Archer adds: “While the EY ITEM Club expects the economy will see a strong return to growth in the third quarter, with GDP expansion possibly reaching around 15% quarter-on-quarter, we suspect growth is likely to slow in the fourth quarter as unemployment rises markedly and support from pent-up demand wanes. Increased uncertainties over the UK-EU relationship could also weigh on economic activity in the fourth quarter, as could some increased restrictions due to any renewed increase in COVID-19 cases.
“Furthermore, it is evident that most MPC members have concerns and uncertainties about the outlook for the UK economy.
“Consequently, the EY ITEM Club believes the Bank of England will decide that it has a further role to play in helping the economy build a sustainable recovery amid likely still challenging and uncertain conditions. The EY ITEM Club expects the Bank of England to announce a further dose of asset purchases, most likely at the November or December MPC meetings and in the region of £100 billion. This would take the total up to £845 billion.
“The EY ITEM Club remains doubtful that the Bank of England will cut interest rates below 0.10%, despite the fact that the Bank continues to review the case for negative interest rates.”
Negative interest rates and other policy instruments
Howard Archer adds: “There was no reporting in the September minutes of the MPC discussing the case for an immediate move to negative interest rates. Significantly though the minutes did reveal that “the MPC had been briefed on the Bank of England’s plans to explore how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates.”
“The Bank of England is holding a review into the case for negative interest rates and other policy instruments open to it and reported on this in their September Monetary Policy Report. The Bank observed that over time the effective lower bound (ELB) for interest rates can change, noting that in the aftermath of the global financial crisis, the MPC judged that the ELB for Bank Rate was 0.5%. In 2016, it judged that the ELB had fallen to ‘close to, but a little above zero’. Those judgements were based on evidence about how any further rate cuts might be passed through to the economy at that time, and the risks they might pose to the financial sector.
“Regarding the current situation, the Bank of England observed in August that “At present, banks’ balance sheets will be negatively affected by the period of severe economic disruption arising from Covid-19. And they have an important role to play in helping the UK economy recover by providing finance for individuals and companies. As a result, negative policy rates at this time could be less effective as a tool to stimulate the economy. That said, the wider economy and banks’ balance sheets would be boosted by stimulus. The net effect of negative policy rates depends on these, among other, factors.”
Howard Archer continues: “The Bank concluded that the MPC has other instruments available — for example, asset purchases and forward guidance. The MPC will continue to assess the appropriate monetary policy stance and will keep the appropriate tools for achieving its remit — including negative policy rates — under review.”