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Bank of England warns on COVID drag as interest rate held at record low

Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·3-min read
El director del Banco de Inglaterra Andrew Bailey en Londres el 16 de marzo de 2020. (Tolga Akmen/AP, FILE)
Bank of England governor Andrew Bailey. Photo: Tolga Akmen/AP, FILE

The Bank of England held the UK interest rate unchanged at 0.1% on Thursday and warned that COVID-19 restrictions were likely to hit economic activity in early 2021.

The central bank’s nine person Monetary Policy Committee (MPC) voted unanimously to keep interest rates unchanged. The committee also kept the Bank’s programme of bond buying — known as quantitative easing — unchanged at £895bn (£1.2bn).

Economists had expected no changes from Threadneedle Street.

The MPC said the long-term outlook for the UK had improved slightly since its last meeting in November, thanks to positive news around COVID-19 vaccines and their rollout, but current economic performance had been worse.

Policymakers said GDP was likely to be “a little weaker” than it had forecast last month due to the ongoing impact of the coronavirus second wave.

“Activity has been stronger than expected, despite the recent rise in Covid cases and associated lockdowns,” the MPC said in a statement. “Nevertheless, the restrictions on activity introduced after those lockdowns have been tighter than the Committee had assumed in its November forecast, and are expected to weigh more on activity in 2021 Q1.”

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At its last meeting in November, the MPC had added £150bn to quantitative easing in a bid to boost the UK’s faltering economic recovery. Growth has slowed since the summer and November’s second lockdown is expected to lead to a double dip for GDP.

Decision makers said monetary policy would remain loose until inflation starts to return to the Bank’s 2% target and the employment picture begins to brighten.

Data this week showed inflation showed to 0.3% last month but the MPC said it expects inflation to “rise quite sharply towards the target in the spring, as the VAT cut comes to an end and the large fall in energy prices earlier this year drops out of the annual comparison.”

The MPC said on Thursday that labour market data was “difficult to interpret”. The committee repeated their view that: “The outlook for the economy remains unusually uncertain.”

Economists think the next time the Bank of England could be spurred in to action could be early next year due to Brexit. Last week Bank of England governor Andrew Bailey said he would not hesitate to act if markets became disorderly around the end of the transition period.

“The MPC will continue to monitor the situation closely,” decision makers said.

“The central bank is right to keep dry the little powder it has left,” said Tom Stevenson, an investment director at Fidelity International. “Brexit deal negotiations are going to the wire and, even with a successful start to the vaccine roll out, the rise in coronavirus cases will continue to be a challenge in the months ahead.”

The pound, which had been rallying strongly on Brexit hopes, was little changed by the announcement.

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