Bank of England Holds Interest Rates at 0.1%pa

The Bank of England’s Monetary Policy Committee (MPC) has voted to keep interest rates at 0.1% pa.

The committee said: “GDP growth slowed in Q1 as Covid-related restrictions continued to disrupt economic activity, but growth did appear to be stronger than they predicted in its February report”.

In Q1 2021, UK GDP was expected to fall by around 1.5% and is expected to rise quickly as restrictions on economic activity ease in Q2.  Although, activity in the quarter is likely to remain around 5% below Q4 2019 levels.

The committee said: “the outlook for the economy remains uncertain even though there is a fall in health risks going forward”.

The MPC’s report also said: “the economic outlook will continue to depend on the evolution of the pandemic, measures taken to protect the public’s health and how households, financial markets and businesses respond to these developments”.

The MPC’s central projections in their May report, sees the economy experience a temporary period of strong GDP growth and a temporary above-target CPI inflation.  After this growth and inflation fall back with inflation around the target 2 and 3 years ahead.

12 months CPI inflation rose to 0.7% in March from 0.4% in February and the MPC predicts that CPI inflation will temporarily rise above the 2% target towards the end of 2021, owing mainly to developments in energy prices.

Despite this, it goes on to say: "these transitionary developments should have few direct implications for inflation over the medium term”.

The MPC’s report concluded: “in judging the appropriate stance of monetary policy.  The committee will as always with its policy guidance focus on the medium-term prospects for inflation including the balance between demand and supply, rather than factors that are likely to be transient”.

“The MPC will continue to monitor the situation closely and take any action that is necessary to achieve its remit”.

“The committee does not intend to tighten monetary policy or at least there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”.

Comment

Much as expected in a post covid-19 recovery. That said, we beleive inflation is going to remain above trend growth for the forseeable future.  Governments around the world need inflation over the medium term to devalue public sector debt without ever repaying it.