Bank of England votes unanimously to leave policy unchanged

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·5 min read
File photo dated 16/3/2020 of the Governor of the Bank of England, Andrew Bailey, who has said that the long-term hit to the economy from the Covid-19 crisis could be smaller than in past recessions. Issue date: Monday March 8, 2021.
Governor of the Bank of England, Andrew Bailey. Photo: PA

The Bank of England left policy unchanged on Thursday, as had been widely expected.

The central bank's 9-person Monetary Policy Committee voted unanimously to keep the UK interest rate at 0.1% and maintain its programme of bond buying at the current level of £895bn ($1.2tn). Economists had forecast no changes ahead of the meeting.

"The Bank of England remained 'steady as she goes' on policy today," said Melissa Davies, chief economist at Redburn. "Despite good news on growth, UK vaccinations and fiscal stimulus, the Minutes dwell on the significant amount of spare capacity remaining in the economy and the high degree of uncertainty over the employment outlook."

The backdrop to the decision was an improving picture for the UK's economy. Recent GDP data has been better than expected and governor Andrew Bailey this week said he expects the UK economy to return to pre-pandemic levels by the end of this year — faster than previously forecast.

At the start of the month, UK chancellor Rishi Sunak announced another huge dose of stimulus intended to kickstart an economic recovery. US president Joe Biden's $1.9tn stimulus package is expected to provide a further boost.

"Developments in global GDP growth have been a little stronger than anticipated, and the substantial new US fiscal stimulus package should provide significant additional support to the outlook," the MPC said in its policy announcement.

The MPC said the UK budget "contained a number of significant new policy announcements" and said: "Plans for the easing of restrictions on activity have been announced and envisage that restrictions could be lifted somewhat more rapidly than was assumed in the February Report."

The brighter global outlook has led to a recent selloff in global government bonds, as investors bet that stimulus will lead to rising inflation and force central banks to raise interest rates earlier than planned. The Bank of England noted the price action but — unlike the ECB — did not announce any action to counter the moves.

"The fact that Governor Bailey felt the need to justify the sharp rise in the UK’s long-term bond yields in recent weeks as reflecting greater optimism about the activity restart was telling," said Vivek Paul, UK chief investment strategist at BlackRock Investment Institute.

"Better data might warrant a rise in yields - albeit limited - but this doesn't mean the MPC will bring forward its plan to raise rates in any meaningful way."

The MPC said inflation was expected to "return swiftly to around the 2% target in the spring" as a result of rebounding oil and energy prices but this should have little impact on medium-term projections.

"The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably," the MPC said.

"Inflation is expected to rise briefly in the Spring but the Bank is happy to 'look through' this," Davies said.

WATCH: What is inflation and why is it important

While the UK's economic outlook has generally brightened, the MPC cautioned that the future path "remains unusually uncertain."

"It continues to depend on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments," the committee said.

The UK's vaccination programme has been a success to date but officials warned this week that the campaign will be delayed due to supply shortages.

Key questions also remain about the strength of the UK's economic rebound once restrictions lift — notably, how much will consumers spend? Andy Haldane, the Bank of England's chief economist, has predicted a strong rebound in consumer spending but his predecessor in the job, Sir Charlie Bean, has said a more gradual drawdown in savings is likely.

Minutes for the March MPC meeting showed division among members despite the unanimous vote.

"Different MPC members placed different weights on the balance of risks around the outlook," the minutes said.

"There was a range of views across MPC members on the degree of spare capacity in the economy currently, whether demand would outstrip supply during the recovery from the pandemic, and how the assessment of supply should take into account the unique nature of the economic shock from the pandemic"

Tom Stevenson, investment director for personal investing at Fidelity International, said: "There are clearly differences of opinion in Threadneedle Street.

"Chief economist Andy Haldane is concerned that the inflationary genie is easier to let out of the bottle than to squeeze back in again. Governor Andrew Bailey sees a more balanced set of risks. They are both right and we don’t yet know whether the scale of pent up demand will offset the eventual end of furlough and other support measures."

The committee said it would "continue to monitor the situation closely" and "stands ready to take whatever additional action is necessary" if inflation begins to weaken.

“The Bank has today left the door open for a range of responses but the balance has clearly shifted towards a tighter bias while the prospect of negative interest rates is fast disappearing into the rear-view mirror," Stevenson said.

Sterling weakened against the dollar and euro in the wake of the announcement. The pound was up 0.2% against the euro (GBPEUR=X) shortly after the statement and down 0.1% against the dollar (GBPUSD=X).

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