BoE’s MPC says UK outlook is ‘unusually uncertain’

Outcome of Brexit talks and evolution of pandemic leave future cloudy, BoE says
Bank of England and Stock Exchange
Rachael King

The Bank of England’s monetary policy committee has warned the UK’s economic outlook remains “unusually uncertain”.

The minutes of the MPC’s December 16 meeting show members are concerned both by the renewed impact of Covid-19 and the UK government’s failure so far to reach a deal in Brexit talks.

 “[The future outlook] depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom,” the minutes said.

UK GDP grew by 0.4% in October, leaving it 8% below its level in the fourth quarter of 2019. Staff at the BoE now expect UK GDP to contract by a little over 1% in December, taking the annual contraction to 11% below its level in 2019.

The MPC unanimously voted to leave interest rates at their current level of 0.1%, and to continue to buy up to £875 billion ($1.19 trillion) of government bonds.

“Activity has been stronger than expected, despite the recent rise in Covid cases and associated lockdowns,” according to the minutes, published today (December 17). “Nevertheless, the restrictions on activity introduced after those lockdowns have been tighter than the Committee had assumed in its November forecast, and are expected to weigh more on activity in 2021 Q1.”

The UK government announced that England would go back into a national lockdown on November 5 to respond to rising Covid-19 infection rates. The national lockdown was lifted on December 2, but many regions are still under severe restrictions.  

The MPC said the exchange rate would “probably fall” and, relative to the projections in the November Report, inflation would be likely to be higher and GDP growth weaker.  

Annual inflation was measured at 0.3% in November as a result of a reduction in economic activity. The BoE’s November monetary policy report also notes that since August, CPI inflation has been affected by the temporary cut in VAT. It forecast that inflation will return to its 2% target by 2022.

The MPC said it does not intend to raise interest rates until there is “clear evidence” that “significant progress” has been made in achieving the 2% inflation target and eliminating spare capacity.

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