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United Kingdom Monetary Policy June 2020

United Kingdom: BoE leaves rates unchanged but boosts bond purchases

At its meeting ending on 17 June, the Bank of England (BoE) left the policy rate at a record low of 0.10%. However, the Bank announced a GBP 100 billion-boost to its bond purchasing program, to take the total stock of investment-grade corporate bonds and UK government bonds to GBP 745 billion.

The Bank’s decision to ease its stance further was driven in part by inflation stuck well below the 2.0% target. Moreover, the BoE sees price pressures moderating further in the coming quarters on weak demand. The extra loosening is also aimed at propping up activity: While the Bank noted that the Q2 downturn in the global and UK economies should be less severe than predicted in May’s monetary policy report, the economic panorama is still gloomy and uncertainty is elevated. The BoE also expressed concern that the recovery in the economy at large, and the labor market in particular, could be sluggish.

The BoE reiterated it “stands ready to take further action as necessary to support the economy and ensure a sustained return of inflation to the 2% target”. However, any further easing would likely take the form of asset purchases or other non-conventional policy tools rather than rate cuts. While talk of negative interest rates has risen in recent weeks due to comments from members of the BoE’s committee, this possibility was not mentioned in the June press release, and our panelists see the Bank Rate unchanged through the end of the year.

Assessing the outlook for monetary policy, Nomura stated:

“Assuming that the recovery takes the path the Bank expects then no further monetary easing may be warranted. As a result, we have updated our view to QE purchases being conducted during the remainder of the year as the MPC has laid out, and no further cuts in Bank Rate.”

Daniel Vernazza, economist at UniCredit, concurred, noting:

“A further increase in the MPC’s stock of asset purchases would likely require a material deterioration in the economic outlook from both its and our current forecasts.”

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