On Thursday night, the Bank of England announced its interest rate resolution, keeping the interest rate level unchanged at 0.1% and the total size of asset purchases unchanged at 895 billion pounds, and the Monetary Policy Committee unanimously agreed to keep the total size of asset purchases unchanged at 895 billion pounds, both in line with market expectations.
After the BoE’s statement, the money market pushed the BoE’s negative interest rate expectations to February 2022, after August 2021. The money market expects the BoE to cut interest rates by 4 basis points in December, and is expected to cut rates by 8 basis points before the BoE announces its decision.
After the resolution was announced, the pound moved higher by more than 70 points against the dollar in the short term.
Bank of England interest rate resolution highlights at a glance
On monetary policy, the Bank of England said that the monetary policy stance remains accommodative. The Bank of England does not intend to tighten policy until the economy makes significant progress, as the economic outlook remains uncertain. The Committee does not intend to tighten monetary policy until there is clear evidence of significant progress in eliminating idle capacity and achieving the 2% Inflation target on a sustainable basis.
The Bank of England does not intend to signal that negative interest rates are coming. The Bank of England said that if necessary, it is appropriate to prepare for negative interest rates. However, there is an operational risk if negative interest rates are implemented within six months.
However, the Bank of England did not completely block the road to negative interest rates. Bank of England Deputy Governor Woods said that most banks can implement negative interest rates within six months. The central also said that in case interest rates fall below zero, the Bank of England will start the grading system work.
In mid-January, Bank of England Governor Tony Blair downplayed negative interest rate expectations, saying there were many problems with lowering interest rates below zero. The overall resilience of the pound suggests that investors are not too worried, as the UK is a world leader in vaccinating its citizens.
On the economic growth front, the Bank of England expects UK GDP to rise modestly in the fourth quarter of 2020, about 8% lower than in the fourth quarter of 2019. Gross domestic product (GDP) in the fourth quarter was significantly stronger than expected in November. 2021 GDP growth is expected to be 5%.
As economic activity picks up in 2021, idle capacity in the economy will be eliminated. Several countries, including the U.K., are implementing new vaccination programs that have improved the economic outlook, with the U.K. unemployment rate set to peak at 7.8% in the third quarter of 2021. The Bank of England expects GDP to return to pre-Epidemic levels in the first quarter of 2022.
The Bank of England’s chief economist, David Holden, previously predicted that the U.K. economy will recover at a “slow pace” from the second quarter.
On the inflation front, the Bank of England sees inflation rising and expects it to return to the 2% target level in the spring of this year. If the inflation outlook weakens in the future, the committee will be prepared to take any additional action necessary to achieve the inflation target. The central bank expects inflation to be 2.1 percent in 2 years and 2 percent in 3 years.
Bank of England Governor Bailey: Don’t over-interpret negative interest rates
At a press conference, Bank of England Governor Bailey said that the Monetary Policy Committee and the UK Prudential Regulation Authority have different views on the implementation of negative interest rates. The Bank of England will make a multidimensional choice of what tools to use in the future. He wanted to send a message to the market – don’t interpret future MPC decisions based on the “contents of the toolbox”. He said not to draw any signals from the preparation of negative interest rates.
Bailey also talked about economic expectations, and he said the economic outlook remains unusually uncertain. The first quarter of this year was quite negatively impacted compared to expectations in November last year. If the inflation outlook weakened, the Monetary Policy Committee would take any necessary action. He also said that expectations for a rapid economic recovery in the second half of the year reflect the positive impact of vaccinations.
Regarding the new trade relationship with the EU, Bailey said he did not see anything that would change the November view, which would be a drag on GDP in the first quarter.
How to interpret the interest rate resolution?
On monetary policy, the Bank of England kept interest rates at record lows, which will leave room for Chancellor of the Exchequer Rishi Sunak to introduce more fiscal stimulus packages in his March 3 budget. To help workers and businesses weather the worst recession in three centuries, the Treasury has accumulated record debt, and Sunak needs stable markets and low borrowing costs to make further progress.
In addition, the Bank of England’s statement on negative interest rates is part of this interest rate resolution that many people are concerned about. For nearly a year, Bank of England officials have been examining the rationale for negative interest rates as they look at options to help Britain emerge from the worst recession in three centuries.
Market analyst Lucy Meakin said the Bank of England minutes section on its thoughts on negative interest rates was a little hard to read and the language on negative rates was a little dense. Its clear that they don’t want to give the market a signal that negative rates are coming, essentially they are trying to avoid suggesting that negative rates will happen, but they also want the banks to be ready if they need to be. So instead of choosing to implement negative interest rates now, the Bank of England is keeping the option open.
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