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United Kingdom Monetary Policy August 2020

United Kingdom: BoE leaves monetary policy unchanged in August, adopts slightly more optimistic tone

At its meeting ending on 4 August, the Bank of England (BoE) left the policy rate at a record low of 0.10%. Moreover, the Bank kept its asset purchasing program unchanged, leaving the target for the total stock of investment-grade corporate bonds and UK government bonds at GBP 745 billion.

The Bank’s decision was underpinned by the economy’s improved performance recently as lockdown restrictions were eased: retail sales bounced back in May and June, while the composite PMI surged in July. This meant that further monetary stimulus was not warranted. Also in August, the BoE released updated economic forecasts. The Bank now sees GDP contracting 9.5% this year (May forecast: -14.0%) before a 9.0% rebound next year, with inflation dipping to 0.3% in the fourth quarter of this year and rising to 1.8% in Q4 2021.

In its communiqué, the Bank stated it “does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. Given inflation is seen remaining below target this year and next, this suggests rates will stay low for a prolonged period, as most panelists expect. That said, the outlook is unusually uncertain, and developments regarding Covid-19 or Brexit could see the Bank change its stance. The BoE also discussed the possibility of negative rates, and kept this policy option under review.

On the possibility of negative rates, analysts at ING commented: “Barring a deterioration of the outlook, we find the risk-reward of positioning for even lower policy rates poor.” Analysts at Nomura adopted a similar tone: “There seems little appetite among the MPC to lower Bank Rate below zero.”

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