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United Kingdom Monetary Policy December 2020

United Kingdom: BoE keeps rates and asset purchases unchanged in December

At its meeting ending on 16 December, the Bank of England (BoE) maintained the policy rate at a record low of 0.10%, where it has remained since March’s combined 65 basis points of cuts. Moreover, the Bank agreed to keep the total stock of investment-grade corporate bonds and UK government bonds at GBP 895 billion. However, the BoE decided to extend the Term Funding Scheme with additional incentives for SMEs (TFSME) by six months to end-October 2021.

The Bank’s decision to keep its monetary stance broadly unchanged was likely driven by a desire to evaluate the impact of the additional GBP 150 billion of asset purchases announced in November. Moreover, positive news on the vaccine front—including the start of the vaccine rollout in the UK—has reduced downside risks to the outlook, allowing the Bank to adopt a wait-and-see approach. The extension of the TFSME was likely aimed at ensuring sufficient credit for businesses until the economy is able to operate again without restrictions.

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 on the cards going forward. This would become particularly likely if Covid-19 restrictions are extended further and/or there is a no-deal Brexit at end-2020. However, most panelists still see the Bank Rate at its current level through end-2021, with additional loosening likely to be done through alternative channels. The next monetary policy decision will be announced on 4 February.

Analysts at Goldman Sachs comment:

“Our long-standing base case is that […] the BoE maintains the current pace of its gilt purchases through 2021H1 and does not cut Bank Rate into negative territory. In the event of a no-deal outcome, we would expect the BoE to accelerate the pace of gilt purchases, ease the terms of the TFSME and cut Bank Rate to zero at the February meeting.”

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