BoE boosts QE by £150bn, leaves rates on hold
By Michele Maatouk
Date: Thursday 05 Nov 2020
(Sharecast News) - The Bank of England kept interest rates on hold at a record low of 0.1% on Thursday, as expected, but boosted its bond-buying programme as it warned of a double-dip recession, just as England heads into its second national lockdown.
The BoE said it will inject an extra £150bn into the economy - taking the total to £875bn - as it cautioned the lockdown will shrink the economy in the current quarter, leading to a double-dip recession. All nine policymakers voted unanimously to keep rates on hold and boost quantitative easing.
Analysts had been expecting a £100bn increase to QE.
"Announcing further asset purchases now should support the economy and help to ensure the unavoidable near-term slowdown in activity was not amplified by a tightening in monetary conditions that could slow the return of inflation to the target," the Bank said.
The BoE also said the economy won't return to its pre-pandemic size until 2022.
"In the Monetary Policy Committee's central projection, GDP does not exceed its level in 2019 Q4 until 2022," it added. Previously, the BoE had expected the economy to recover next year.
GDP is expected to fall by 11% for 2020 as a whole. Prior to the renewed surge in coronavirus infections and the implementation of further restrictions, the BoE had forecast a 9.5% contraction.
"As a result, unemployment is elevated," it said. The unemployment rate is expected to peak at around 7.75% in the second quarter of 2021, before declining gradually over the forecast period as GDP picks up.
Ruth Gregory, senior UK economist at Capital Economics, said this was unlikely to be the last expansion of QE.
"We were virtually the only forecaster to predict back in June that the Bank would loosen monetary policy further at its November meeting. By announcing an extra £150bn today, the MPC didn't disappoint as that was slightly greater than our forecast of £100bn.
"And this extra QE is unlikely to be the last expansion. We think the MPC will announce at least £100bn more QE in 2021, more than the consensus currently expects."
Laith Khalaf, financial analyst at AJ Bell, said the Bank is beginning to run out of dry powder as it now holds almost half the gilt market and interest rates are already close to zero.
"That means if the central bank wants to boost the economy further, it may resort to even more extraordinary measures than we have today.
"Negative interest rates are certainly on the table. The Bank is seriously weighing this up and has written to bank chiefs to see if they can handle it. QE could also shift towards different assets, such as more corporate bonds, high yield bonds and even equities, as has happened in Japan.
"Much will depend on how the pandemic, social restrictions and the government's fiscal response proceed from here. For the moment markets are pricing in a 40% chance of an interest rate cut next year, and it's fair to say that markets have consistently underestimated the capacity for monetary policy to loosen ever since the financial crisis."
Email this article to a friend
or share it with one of these popular networks:
You are here: news
10 Lower Thames St,
London EC3R 6EN