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United Kingdom Monetary Policy September 2020

United Kingdom: BoE stands pat in September, opens door to negative rates in near future

At its meeting ending on 16 September, 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 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 continued improvement in recent months as lockdown restrictions were eased: Retail sales bounced back in May–July, while the composite PMI surged in July–August. This meant that further monetary stimulus was not warranted.

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”. Amid an unusually uncertain outlook, the Bank noted that it is exploring “how a negative Bank Rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates“.On the possibility of negative rates, Kallum Pickering, senior economist at Berenberg, commented:

“While the BoE is clearly exploring the possibility of using negative rates as a potential tool, we doubt that the bank will go down that path anytime soon – at any rate, not in November.”

Analysts at Nomura adopted a similar tone:

“We remain circumspect about how helpful further rate cuts into negative territory would be. [However], negative rates have worked elsewhere and they could yet be used as one of a package of measures, including more QE, early next year – if needed.”

The next monetary policy meeting is scheduled for 5 November.

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