Bank of England keeps interest rates at 0.1% but warns on economic outlook

a large stone building: Photograph: Toby Melville/Reuters

© Provided by The Guardian
Photograph: Toby Melville/Reuters

The Bank of England said the economic recovery remained on track but warned the outlook remained “unusually uncertain” after voting to keep its main interest rate unchanged at 0.1%.

Health concerns would continue to drag on the economy’s ability to rebound from the coronavirus lockdown and there was still the prospect of a steep rise in unemployment, the central bank’s monetary policy committee said in its September report.

The central bank’s nine-strong interest rate setting committee also voted unanimously to maintain its £745bn quantitative easing (QE) programme, which has increased by £300bn since March and acted to keep long term interest rates low for mortgages and government borrowing.

City analysts said they expect the monetary policy committee (MPC) to add a further £100m to its QE programme in at its next meeting in November if the recovery from the coronavirus lockdown continues to be slow.

In a letter to the chancellor Rishi Sunak, Bank of England governor Andrew Bailey said the MPC had held rates despite a sharp fall in inflation in August to just 0.2%.

The governor is required to write to the chancellor each time inflation is one percentage point above or below the 2% inflation target set by the Treasury.

In the letter, Bailey said: “The temporary cut in VAT for hospitality, holiday accommodation and attractions, together with the government’s Eat Out to Help Out scheme, were expected to lead to a material drop in inflation in August. These effects have transpired.”

He added that inflation was expected to stay low while office-based staff returned slowly to work and local lockdowns restricted economic activity.

But the MPC forecast a rise in GDP during the third quarter of 18%, showing it remains bullish that the impact of Brexit and the coronavirus will fade towards the end of the year.

Analysts said the central bank’s officials would be mindful of core inflation, which excludes volatile elements of goods and services in the inflation basket, and remained higher at 0.9% in August.

Andrew Wishart, an economist at the consultancy Capital economics, said: “As the MPC is wary of the side-effects of negative interest rates on banks, we think that will come in the form of a further £100bn instalment of QE (consensus £50bn).

“And in any case, with the MPC today repeating the guidance that it won’t tighten policy “until there was clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2% inflation target”, we expect interest rates to be no higher than 0.10% for the next five years,” he added.

a large stone building: A worker wearing a protective face mask passes the Bank of England in the City of London.

© Photograph: Toby Melville/Reuters
A worker wearing a protective face mask passes the Bank of England in the City of London.

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