Interest Rate Shock Increase? Not Today, Frozen at 0.1%pa

The Bank of England Monetary Policy Committee (MPC) met yesterday to set the UK’s monetary policy to deliver the inflation target set by government at 2%pa.  A crucial element in these discussions is the setting of the Bank of England interest rate.

The minutes of the meeting have been released today confirming by a unanimous vote of 7:1 that Bank Rates are frozen again at 0.1%pa.

The Bank of England MPC also confirmed that its programme of quantitative easing would continue with £875bn of QE maintained and as well as the purchase of non-financial investment grade corporate bonds of £20bn effectively lending money to low risk/stable larger companies that need capital to grow.  This is yet another way for the Government or the Bank to stimulate the economy and moves stimulus up to £895bn.

The minutes suggest that the MPC, despite recent covid-19 rises, expects to see GDP growth of 3% in Q3 (it was 5% in Q2) as businesses ‘wake up’ after lockdown and this 4th wave of infections as the UK gets back to normal trade conditions.  The MPC suggests it expects covid-19 numbers to fall and economic activity rise to over the next year.

Comment

Both CPI inflation (and RPI) are above government trend growth targets of 2%pa and many expected a shock interest rate increase today.  We privately believe that the Bank of England will follow the Federal Reserve in the USA in that 'the Fed' stated that it will "not use interest rates to control inflation for the foreseeable future" and we will likely only see two interest rates increases towards the end of 2023 where they are forecast to increase from 0.1%pa to 0.6%pa.

Could it be that a trade deal is close between the UK and USA and for the time being, as well as letting the economy recover from covid-19, that both sides of the 'big pond' want stability on rates and currency?  This would mean that one side does not gain commercial or currency rate advantage over the other until a trade deal is reached.