The Bank of England held interest rates at a record low 0.1% on Thursday 26 March, as policymakers warned of a bleak outlook for the UK economy due to Covid-19.
The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to keep policy unchanged at its monthly meeting, including keeping its asset buying programme at £645bn ($766bn).
Economists had widely expected no new actions and the pound was largely unmoved by the MPC announcement.
The decision follows a period of extraordinary activity by the central bank in response to the coronavirus pandemic.
The Bank of England has twice cut interest rates in unscheduled moves this month, taking the rate down from 0.75% to a record low of 0.1%.
The MPC said on Thursday its “challenge over recent weeks has been to respond to the severe economic and financial disruption caused by the spread of Covid-19.”
The committee painted a bleak picture of the UK economy, which has all but ground to a halt after the prime minister ordered all non-essential businesses to shut and told the public to stay at home as much as possible.
“In the near term, many people will be unable to work for a period and others are adjusting their working arrangements,” the MPC said in a statement.
“Many consumer-facing companies are now required to cease operations for a time, while other businesses have also needed to cease or scale back their activities.
“Household spending on social activities and other delayable forms of consumption is likely to decline materially. In an environment of heightened uncertainty, businesses are likely to postpone investment decisions. Exports are likely to weaken.”
Without support from the government and the Bank of England, the MPC said there could be “longer-term damage to the economy,” as businesses go bust and people lose their jobs. Half a million people have already applied for unemployment benefits in just the last nine days.
The MPC said it was too early to tell just how bad things would get for the UK but pointed to recent data suggesting we would see “a material contraction in GDP.”
The central bank has already announced a slew of new programmes aimed at stabilising markets and supporting the economy. These include an additional £200bn of asset purchases, targeted support for small businesses, and collaboration with the US Federal Reserve on ‘swap lines’, which allow the Bank of England easy access to dollar funding. The emergency actions are part of a coordinated package of support with the UK Treasury.
As well as sharp slowdown in the economy in recent weeks, the MPC also flagged extremely stressed conditions in financial markets.
The FTSE 100 (^FTSE) has fallen by 25% over the last five weeks. Meanwhile, the pound and UK debt last week experiences a rush of selling, pushing sterling to its lowest level against the dollar since 1985. The run on the pound prompted the second emergency rate cut from the Bank of England.
Separately on Thursday, the Bank of England said it had lent a record £11.1bn to banks in short-term financing over the last three months, another sign of stress in markets.
“The MPC will continue to monitor the situation closely and, consistent with its remit, stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy,” the committee said in Thursday’s statement.