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United Kingdom Monetary Policy November 2020

United Kingdom: BoE keeps rates unchanged in November but boosts asset purchases

At its meeting ending on 4 November, 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. However, the Bank announced an additional GBP 150 billion of asset purchases, taking the total stock of investment-grade corporate bonds and UK government bonds to GBP 895 billion.

The Bank’s decision was driven by a desire to provide further support to the economy, as England recently went into a second lockdown and other parts of the UK also announced additional restrictions. Moreover, inflation is running well below the Bank’s 2% target, providing ample space for the move. The BoE opted to loosen its stance via further quantitative easing rather than rate cuts due to a reluctance to cut rates into negative territory.

In its communiqué, the Bank adopted a more dovish tone than at the prior meeting, stating that it “stands ready to take whatever additional action is necessary to achieve its remit”. This suggests further easing is on the cards going forward, which would be particularly likely if Covid-19 restrictions are extended and/or there is a hard 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 17 December.

According to George Buckley, an economist at Nomura:

“By announcing a larger addition to the QE programme the Bank has given itself a lot of flexibility – it intends to purchase at a rate similar to what it has been doing recently to begin with (£4.4bn per week) in the hope that this can be stepped down at some point in 2021. But in announcing such a substantial increase in purchases the Bank also has the ability to increase the weekly drip-feed of policy support being administered if the need should arise. This suggests to us that the marginal tool of policy easing remains asset purchases and that the Bank has plenty of room to adjust this without the need for further immediate increases in the QE envelope or by having to move Bank Rate into negative territory.”

Among the few panelists that do forecast lower rates are RBC Capital Markets, who state:

“Less fiscal support and growing trade uncertainty call for easier monetary policy, and we expect […] a bank rate cut (into negative territory) in February.”

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