On the 4th August the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to hold rates at 0.1% pa with an uncertain outlook for the UK and global economies.
The committee will only tighten monetary policy when there is significant progress made in eliminating spare capacity and achieving the 2% inflation target sustainably.
In the MPC’s central projections, as social distancing eases and consumer spending picks up, GDP will continue to recover. Business investment may slowly recover but employment will decline gradually from the beginning of 2021 onwards.
The MPC’s central projection also states that a margin of spare capacity is likely to remain until the end of 2021 as GDP is not expected to exceed its level in Q4 2019 until the end of next year.
12-month CPI inflation is expected to drop below the 2% target in the later part of the year.
Inflation did increase from 0.5% in May to 0.6% in June and CPI inflation is expected to be 2% in 2 years’ time.
Stock markets reacted negatively to the news but we not not see the susprise here. There is little point looking at economic stimulus until a better handle can be gained on coronavirus, a second wave and potentially the largest economic downturn in over 100 years.