Yesterday, the Monetary Policy Committee (MPC) of the Central Bank of England met to assess whether the UK's recovery requires further monetary policy action. We recall that the target inflation level that the MPC sets in its economic policy action is 2%. The inflation level currently stands close to zero. In this context, its current challenge is to respond to the economic and financial impact of the Covid-19 pandemic, as well as the possible no-deal scenario for Brexit and the record 20% economic contraction of the G7 countries.
At the meeting, the Monetary Policy Committee voted unanimously for both keeping the UK interest rate at 0.1 (at an all-time low) and for the Bank of England continuing with its existing programs to purchase UK government bonds, worth 745 billion pounds. The Bank of England said: "The Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in achieving the 2% inflation target in a sustainable way". Despite an unexpected improvement in the latest economic data in August, the MPC stated that it is not clear how indicative this is on the long-term trend of the economy. In fact, the recent increases in Covid-19 cases and the rise in unemployment could further weigh on economic activity. According to the Bank of England, in such an uncertain scenario, negative repercussions on employment and the economy cannot be excluded.
Shortly after the announcement to keep interest rates low by the Bank of England, the exchange rate of the pound traded lower (-0.5%) than the dollar and the performance on short-term government bonds fell further. Lastly, the Bank of England has forecast unemployment at around 7.5% by the end of the year.
Photo Credit: Robert Bye