On Thursday, the Bank of England indicated that it might cut interest rates below zero. If it happens, it will be the first time in its 326-year history as it tries to shore up a United Kingdom economy facing the double headwinds of the Brexit and coronavirus.
Monetary Policy Committee unanimously decided to maintain the main interest rate of the Bank at the record low of 0.1%. After that, the nine-member rate-setting Monetary Policy Committee said that it discussed the effectiveness of negative policy rates and policy toolkit.
Minutes after the decision, the rate-setters talked about a recent wave of virus infections. Thus, they are sad that it has the potential to weigh further on economic activity, albeit probably n a lesser sale that it had earlier in the year.
At its last meeting in early August, the committee noted that the recent economic data have been a ‘little more robust than forecast. Nevertheless, it is unclear what that says about the future ‘given the risks.
One clear concerning sign relates to whether Britain (like others in Europe) will reimpose broad restrictions on public life and businesses. Moreover, it is a concern after the recent flare-up in virus infections across the region. Already, the United Kingdom made localized lockdowns in certain areas and restricted social gatherings.
This year, the British economy suffered one of the deepest recessions in the world. Nevertheless, many sectors were effectively mothballed to help to contain the pandemic. In the summer, it couped some ground as lockdown restrictions eased. At the end of July, the economy was still about twelve percent smaller than in February, when the pandemic began in Europe.
Bank of England
The other significant risk facing the United Kingdom economy relates to the post-Brexit trade discussions. Discussions are between the European Union and the United Kingdom following a worsening in relations. In the case of talks collapse, both sides will impose tariffs and other impediments at the beginning of 2021. That way of development will be hurtful for the United Kingdom.
On January 31, the United Kingdom was out of the European Union. Nevertheless, it is in a transition period that effectively sees it benefit from the tariff-free trade of the bloc until the end of the year. Meanwhile, they will negotiate a relationship.
The Bank will not provide more stimulus on Thursday, with the outlook so murky. It has cut its introductory rate to a record low since the pandemic started. Moreover, it boosted its bond-buying program to oil the wheels of the financial market and kept borrowing affordable.
On Thursday, the policymaking panel said that it might take further action on borrowing costs. It happened after revealing it had been briefed on how to implement negative interest rates effectively.
Thus, it will seek to encourage banks to lend rather than hoard their cash. The Central Bank will have further discussions concerning the potential use of a negative rate amid the fourth quarter.
Nevertheless, it does not necessarily mean a rate cut will happen this fall. It is a clear signal that the Bank might enact further stimulus measures.
That is the current situation in the United Kingdom.