The Bank of England on Thursday held interest rates steady and maintained its existing level of asset purchases, but warned it is anticipating a slower economic recovery from the coronavirus crisis. All members of the Monetary Policy Committee voted to keep the main lending rate at 0.1%, with the central bank having cut rates twice from 0.75% since the beginning of the pandemic.
The committee also voted unanimously against extending its bond-buying program, having announced an additional £100 billion ($131.4 billion) expansion in June which took the total value of the Asset Purchase Facility to £745 billion. However, the central bank said it does not expect the U.K. economy to exceed its pre-coronavirus levels until the end of 2021. It had previously projected that GDP (gross domestic product) may return to 2019 fourth-quarter size in the second half of next year.
In the shorter-term, policymakers gave a more optimistic outlook, with GDP now expected to shrink by 9.5% in 2020 compared to the 14% contraction expected in May. It is then expected to rebound by 9% in 2021 and grow by a further 3.5% in 2022.
Inflation was 0.6% in June, up from 0.5% in May, but well below the Bank’s 2% target, and is expected to fall further to average around 0.25% in the latter part of the year to reflect the impacts of Covid-19. Like many of Europe’s major economies, the British government has been forced to reintroduce some restrictions on travel and social activity in recent weeks amid fears of a second surge in coronavirus cases, while a new localized lockdown has been announced in the Scottish city of Aberdeen.
Alongside the pandemic, the U.K. is also navigating tense discussions with EU leaders in a bid to hammer out a new trading relationship. Should talks fail, the U.K. would face a sudden exit from its transitional period without a trade agreement at the end of the year, a scenario widely expected to compound the economic damage caused by the pandemic. The next round of talks is set to commence on August 17.