Bank of England holds rates

The Bank of England last week opted to keep its main interest rate at the record low of 0.1% as it painted a fairly rosy picture about the near-term prospects for the British economy following the lifting of lockdown restrictions in the wake of the rapid rollout of coronavirus vaccines.

In a statement accompanying its decision, the central bank’s rate-setting Monetary Policy Committee said “a waning impact” from COVID-19 would boost demand growth and help the British economy reach its pre-pandemic level by the end of the year. The committee also maintained the bank’s monetary stimulus at current levels though one of its eight members voted to reduce the level of asset purchases from £875 billion to £830 billion.

The decision to keep rates unchanged was unanimous. In its quarterly economic projections, the bank said the British economy is set to rebound by 7.25% this year, unchanged from its previous projection. However, it modestly upgraded its forecast for next year to 6% from 5.75%. The bank said growth is expected to slow toward more normal rates, partly reflecting lower government spending as many pandemic programs, such as a salary support scheme, end.

One uncertainty cited was how the economy will adjust to the end of the furlough scheme, which was introduced at the start of the pandemic last March to ensure unemployment did not rise substantially when lockdown restrictions were imposed. Under the program, the government paid 80% of the salaries of those workers unable to work because of lockdown measures. The program helped support over 11 million people but the number now is down below the 2 million mark as many sectors have reopened, notably hospitality. It kept a lid on unemployment, which remains relatively low at around 5%.

The committee also warned of a “more pronounced period” of above-target inflation in the near term than expected in May but said that its overall view is that cost pressures will prove “transitory.”

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Source: Techlink