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Bank Of England Boosts QE; Holds Record Low Rate

bankofengland 18jun20

The Bank of England announced additional quantitative easing and left its interest rate unchanged at a record low to combat the sharp recession triggered by the coronavirus pandemic.

The Monetary Policy Committee, headed by BoE Governor Andrew Bailey, decided to raise the size of the asset purchase programme by GBP 100 billion to GBP 745 billion.

Eight members including Bailey voted to raise the QE as they judged that a further easing of monetary policy is warranted to meet its statutory objectives, while Chief Economist Andrew Haldane preferred to maintain the programme at GBP 645 billion.

The MPC expects the programme to reach GBP 745 billion, around the turn of the year.

The nine-member committee unanimously decided to hold the interest rate at 0.10 percent, as widely expected. The bank had altogether reduced the rate by 65 basis points at two unscheduled meetings in March.

The need to continue supporting the economy will undoubtedly fuel further discussion about whether negative rates are on the horizon, ING economist James Smith said.

"We certainly wouldn't rule out negative rates further down the line, particularly if the economic recovery does prove to be more turbulent," the economist added.

Policymakers said they are ready to take further action as required to support the economy and ensure a sustained return of inflation to the 2 percent target.

Inflation has fallen to 0.8 percent in April, triggering the explanatory letter from the BoE Governor to the Chancellor alongside this monetary policy announcement. Inflation then fell further to a four-year low of 0.5 percent in May.

The below-target inflation was largely driven by the effects of the pandemic. Lower oil prices and the sharp drop in domestic activity added downward pressure on inflation through increased spare capacity.

Recent data suggested that the fall in the second quarter GDP will be less severe than previously estimated, but cautioned about a risk of higher and more persistent unemployment.

The economy and the labor market will take some time to recover towards its previous path, the bank said. Inflation is projected to fall further in coming quarter, reflecting weak demand.

The MPC noted that there are greater risks around the potential for longer lasting damage to the economy from the pandemic.

The economy had contracted at a record pace of 20.4 percent in April from March, as the pandemic hit all areas of the economy.

The Organisation for Economic Cooperation and Development, last week, projected the UK economy to shrink sharply by 14 percent in 2020, if there is a second virus outbreak later in the year. An equally likely single-hit scenario would still see GDP fall sharply by 11.5 percent, the think tank said.

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