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Pound dips as Bank of England leaves door wide open for negative interest rates if unemployment soars or a second wave hammers the economy

This Is Money logo This Is Money 17/09/2020 14:28:04 Adrian Lowery for Thisismoney.co.uk
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The Bank of England will consider turning interest rates negative if the economy stalls in the face of soaring unemployment or a second wave of Covid.

Keeping interest rates on hold at 0.1 per cent today amid evidence that the economy is emerging well from the paralysis of lockdown, the Bank warned that the outlook was 'unusually uncertain'.

Minutes of today's monetary policy committee meeting show the Bank will in the following months consider the case for negative interest rates together with the Prudential Regulation Authority . 

Sebastien Clements, currency analyst at OFX, said that sterling slipped below $1.29 this afternoon, 'with the majority of the pound's sell-off in reaction to the Bank's announcement of plans to explore the implementation of negative interest rates'.

a group of people walking in front of a building: All nine members of the MPC voted to leave rates unchanged and keep its quantitative easing programme to boost the economy at £745 billion. © Provided by This Is MoneyAll nine members of the MPC voted to leave rates unchanged and keep its quantitative easing programme to boost the economy at £745 billion.

The minutes signalled nervousness about the impact of both the pandemic and stalling Brexit negotiations, according to Tom Stevenson, Investment Director at Fidelity International.

'The Bank of England has once again left itself room for manoeuvre, with the prospect of rates falling to zero or even negative territory before the end of the year,' he said.  

'The UK's central bank faces the unenviable challenge of deciding if and when to take rates lower as a number of determining factors - fears of a second wave of infections, the impending blow from the end of furlough, and a likely 'no deal' Brexit - change on a daily basis,' he added.

'It's an uncomfortable balancing act for the Old Lady.'

All nine members of the MPC voted to leave rates unchanged and keep its quantitative easing programme to boost the economy at £745billion.

The Bank said recent economic data had been stronger than it expected in August, but it warned rising coronavirus cases in the UK and worldwide could hamper the economic bounce-back.

 The Bank said: 'Recent domestic economic data have been a little stronger than the committee expected at the time of the August Report, although, given the risks, it is unclear how informative they are about how the economy will perform further out.

'The recent increases in Covid-19 cases in some parts of the world, including the United Kingdom, have the potential to weigh further on economic activity, albeit probably on a lesser scale than seen earlier in the year.'

The decision comes after official figures showed the economy grew by 6.6 per cent in July, which experts said puts the economy on track for a double-digit bounce-back from recession.

But worries are mounting over mass unemployment and long-term economic scarring from the pandemic once Government support schemes end. The emergence of what could be a second wave of the virus is also unnerving financial markets.

Inflation remained well below the Bank's 2 per cent target in August - plunging to just 0.2 per cent - so there is certainly no case at the moment for an increase in rates. 

However, many believe the Bank could launch further action later this year, likely in the shape of more bond-buying in November or December to prevent the economic rebound fizzling out.  

a man wearing a suit and tie: Bank Governor Andrew Bailey said recently he expects the pandemic to permanently scar the economy by reducing GDP by 1.5 per cent © Provided by This Is MoneyBank Governor Andrew Bailey said recently he expects the pandemic to permanently scar the economy by reducing GDP by 1.5 per cent

The Organisation for Economic Co-operation and Development predicts the UK economy will shrink by 10 per cent this year, which is only a little bit better than its previous prediction of an 11.5 per cent decline.       

Bank Governor Andrew Bailey said recently he expects the pandemic to permanently scar the economy by reducing GDP by 1.5 per cent, while deputy governor Sir David Ramsden warned it could be even worse. 

17. syyskuuta 2020 17:28:04 Categories: This Is Money

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