The Bank of England (BOE) delivered its monetary policy decision yesterday. As everyone expected, it did nothing, preferring a wait-and-see approach to the outcome of the upcoming Brexit.
By doing nothing, the BOE keeps the easiest monetary policy in the United Kingdom seen for many years. The current bank rate is at 0.1%, and the bank is actively involved in quantitative easing – buying bonds from the UK government with the aim of depressing the yields.
Quantitative easing was widely used during the COVID-19 recession by central banks all over the world. When the interest rate hits the lower boundary, like in the case of the bank rate set by the BOE, the central bank uses unconventional monetary policies to ease financial conditions even further. By buying bonds and lowering the yields, businesses and households have access to better financing conditions.
Brexit – The Elephant in the Room
All central banks had a terrible year. Once again, they were forced to innovate as the world faced the second recession in a decade. In the case of the BOE, the mission was even more difficult, as it had to prepare for Brexit too.
How the United Kingdom leaves the European Union remains unknown at this time. With only a few days left until the transition period expires, the world still does not know if there will be a “deal” between the two parties or not. As such, the BOE does not know either, so it had to prepare for any eventuality.
Quite a tough spot for the BOE. On the one hand, the bank rate is at the lower boundary. On the other hand, quantitative easing has already been deployed. Yet, a “no-deal” Brexit means the country will trade with the EU under WTO (World Trade Organization) terms starting with January 2021. These are unfavorable terms for both parties, yet this is a possibility.
As such, the BOE did not waste precious time and studied negative rates in the second half of this year. It looked at both advantages and disadvantages, and it effectively communicated to markets that lowering the bank rate below zero is a tool at its disposal.
No one knows what happens starting with January. Yet, everyone knows that the BOE stands ready to act if things look to go out of control.