The much-awaited Monetary Policy Committee (MPC) summary from the Bank of England (BOE) was released yesterday – the bank kept its interest rate steady at 0.1% and added GBP100 billion to its quantitative easing program.
To date, BOE buys government bonds and sterling non-financial investment-grade corporate bonds to the amount of £745 billion, in an effort to ease the economic pain created by the coronavirus pandemic.
The UK Economy During Corona Times and the BOE’s Response
The COVID-19 pandemic affected the UK economy in a way not seen in decades. The GDP contracted by around 20% in April, following another drop of 6% in March. Moreover, inflation dropped from 1.5% to 0.8%, threatening to reach the zero level and triggering the explanatory letter from the Governor to the Chancellor, published alongside yesterday’s monetary policy announcement.
For a central bank targeting a symmetrical 2% inflation target, the recent drop caused by lower oil prices and reduced consumption due to the coronavirus meant that the BOE had to act. It usually follows in the footsteps of the Federal Reserve of the United States (Fed) – so it comes at no surprise that it engaged in quantitative easing and lowered the interest rate close to the zero level.
Traders waited to see the BOE’s decision to assess if there was unanimity in expanding the quantitative easing program or not. As it turns out, there was one dissenter, BOE’s Haldane – and the pound rose on the news. However, the bounce was quickly reversed as investors noted the dovish tone of the overall BOE message.
All in all, BOE signalled it is ready to take further action as needed to aid the economy. Moreover, it sees a bounce in the GDP in the months ahead, albeit, the precautionary behaviour by households and businesses are likely to persist.
Coupled with the fiscal measured by the British government, the direction taken by BOE should help the economy get back on track. Assuming there is no second wave in infections rate, the evidence suggests a stronger GDP moving ahead and consumption to pick up slowly.
However, as it became obvious in other parts of the world too, this is not going to be a V-shape economic recovery. Central banks already signal that the easy monetary policy is here to stay, and BOE stands ready to do more.