Bank of England Keeps Rates Unchanged At Record Low, Warns Of Slower Recovery

The Bank of England kept its key interest rate unchanged at a record low of 0.1% on Thursday, but warned that the U.K. economy will not return to pre-COVID-19 pandemic levels until the end of 2021.

The bank’s Monetary Policy Committee, or MPC, also left the target for the total stock of its asset purchases unchanged at £745 billion ($981 billion).

The central bank expects the U.K. economy to shrink by 9.5% this year – well below its initial estimate of a 14% decline. MPC also projected that Britain’s economy in the second quarter of 2020 will be more than 20% smaller than in the fourth quarter of 2019.

“The outlook for the U.K. and global economies remains unusually uncertain,” the MPC said. “It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors.”

Still, the committee noted that the U.K. housing market “appears to have returned to close to normal levels, despite signs of a tightening in credit supply for some households.”

"We have had a strong recovery in the last few months. The pace puts the economy ahead of where we thought it would be in May," bank Governor Andrew Bailey said.

Employment levels have fallen since the COVID-19 outbreak, but the MPC indicated joblessness has been “very significantly mitigated by the extensive take-up of support from temporary government schemes.”

In the near term, MPC expects the unemployment rate to double to about 7.5% by the end of the year – then gradually decline starting in early 2021.

“Nonetheless, the recovery in demand takes time as health concerns drag on activity,” MPC cautioned. “[Gross domestic product] is not projected to exceed its level in [fourth quarter 2019] until the end of 2021, in part reflecting persistently weaker supply capacity.”

MPC expects the U.K. economy to grow by 9% in 2021, and then by 3.5% in 2022.

The committee also said it has no plans to raise interest rates “until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”

As for pushing interest rates below zero, the Financial Times reported that Bailey said negative rates “are part of our toolbox . . . but at the moment we don ’ t plan to use them.”

Ruth Gregory, an economist at Capital Economics, said the bank will likely keep interest rates at 0.1% "or below" for "at least five years.”

But some economists think the bank’s projections for an economic rebound are unwarranted.

“The V-shaped recovery that the [Bank of England] continues to project seems unlikely, to put it very mildly,” said Kallum Pickering, economist at investment bank Berenberg. “In our view, economic developments will very likely fall short of this near-perfect scenario and . . . policymakers may eventually need to do more to support the recovery. ”

Dharshini David, BBC’s globe trade correspondent, wrote of the central bank: “The economic damage may have been less catastrophic than feared in recent months, but the bank thinks the scars will remain for longer, both to activity and jobs.”

David added: “The bank believes it will take the economy until the end of 2021 to get back to pre-crisis activity. Crucially it admits the risks are to the downside – not least as it assumes that the health risks from the virus and restrictions gradually recede, with no significant resumption of a widespread lockdown. That could prove a serious setback.”