Bank of England keeps interest rates and stimulus push unchanged

The central bank does not plan to tighten monetary policy until economic conditions ease

The Bank of England left the size of its bond-buying programme unchanged at £745 billion on Thursday. Reuters

The Bank of England held interest rates at a record low of 0.1 per cent on Thursday, as central bank governor Andrew Bailey said it does not intend to tighten monetary policy until economic conditions improve.

The UK regulator also left the size of its bond-buying programme unchanged at £745 billion ($966bn/Dh3.5 trillion), as the BoE’s monetary policymakers voted unanimously to keep rates on hold in the midst of poor unemployment and inflation data.

“The outlook for the economy remains unusually uncertain. The committee will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit," said Mr Bailey in a statement from the BoE.

“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 per cent inflation sustainably.”

The BoE’s decision follows the US Federal Reserve, which held interest rates near zero on Wednesday and signalled they would stay at that level for at least three years. The Fed also vowed to delay tightening until the US gets back to maximum employment and 2 per cent inflation as it recovers from the effects of Covid-19.

The UK central bank said recent increases in coronavirus cases, including in the UK, could potentially weigh further on economic activity and warned that the monetary policy committee had been briefed on the BoE’s plans to explore how a negative rate could be implemented effectively, should the outlook for inflation and output worsen.

Naeem Aslam, chief market strategist at London’s Avatrade said sterling dipped on the BoE’s comments that it will engage with regulators to implement negative rates.

“Traders now know that they draw a lot of blood out of this trade and the currency pair which you want to pay the most attention is EUR/GBP," Mr Aslam said.

“The expectations were that the BoE will signal the possibility of increasing its stimulus given the chaos that we are witnessing on the Brexit front. After all, this remains the key risk for the bank’s monetary policy. However, the language has heated up and there is a possibility that the interest rates could be moving in negative territory if there is no deal Brexit."

The UK slipped into its first recession since 2009 in the second quarter of this year posting a record 20.4 per cent contraction that made it the worst-performing European economy. The government has been criticised for acting later than its European counterparts to implement a lockdown, which led to the country paying a heavy economic cost and suffering the highest number of Covid-19 fatalities in the region.

Britain’s unemployment rate jumped to 4.1 per cent in the second quarter - the first increase since the lockdown began in March - as the effects of Covid-19 took their toll on the country's job market, the Office for National Statistics said on Tuesday.

Analysts expect the unemployment to peak in November at 8.9 per cent after the country’s furlough scheme to help employers retain staff comes to an end on October 31.

Ten per cent of the workforce remain on furlough leave, and 11 per cent of businesses were at a moderate or severe risk of insolvency, according to the latest Business Impact of Coronavirus Survey on Thursday.

Meanwhile, in another sign of volatility for the government, the UK inflation rate rose by just 0.2 per cent in August from July’s 1.0 per cent increase due to the government's restaurant subsidy scheme which aims to boost spending.

Keeping interest rates low is a boon for property investors, who are already benefitting from UK chancellor Rishi Sunak's temporary Stamp Duty Land Tax holiday designed to stimulate the market.

"In recent days we've seen some lenders reduce the cost of mortgages at lower loan-to-value (LTV) ratios even further. However, anybody that needs finance at 85 per cent LTV and above are facing substantially higher rates than at the outset of the pandemic ... because lenders are now grappling with such a large volume of transactions that raising the cost of these mortgages ... is the most efficient way of controlling the flow of new applications."