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United Kingdom Monetary Policy February 2021

United Kingdom: BoE keeps rates and asset purchases unchanged in February; prepares to add negative rates option to policy toolkit

At its meeting ending on 3 February, the Bank of England (BoE) maintained the bank rate at a record low of 0.10%, where it has remained since March 2020. Moreover, the Bank agreed to keep the total stock of investment-grade corporate bonds and UK government bonds at GBP 895 billion. In addition, the Bank announced it would engage with financial firms to ensure they are ready to implement a negative bank rate after six months. As such, the BoE will incorporate the option of negative interest rates into its policy toolkit, but is thus not likely to cut rates into negative territory over the next six months.

The Bank adopted a wait-and-see approach in the face of an uncertain economic outlook. On one hand, the brisk domestic vaccine rollout bodes well for economic activity later this year, while the Bank sees inflation—although currently below its 2% target—approaching the target “quite sharply” in the spring. As such, further easing was not warranted. On the other hand, given the economy is still in lockdown, the BoE judged it premature to reduce stimulus.

In its communiqué, the Bank reiterated the previous meeting’s forward guidance that it “stands ready to take whatever additional action is necessary to achieve its remit” of 2% inflation. As such, further easing remains possible going forward, and would grow more likely if the recovery stalls, and inflation fails to accelerate as the Bank predicts. That said, most panelists see rates on hold this year, with any extra easing more likely to come through other channels. The next monetary policy decision will be announced on 18 March.

On the possibility of negative rates, analysts at Nomura commented:

“The first possible time that the Bank could now set interest rates below zero, if it is to hold true to this timeframe, would be at its 5 August meeting. At that point, however, the Bank thinks that GDP will be rising strongly and inflation having risen from its current 0.6% to around 1.5%. If the Bank is right then this is not the sort of backdrop against which we would be expecting the MPC to loosen policy further – whether that be rate cuts below zero or additional/faster asset purchases.”

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