The Bank of England chose to maintain its policy rate at 0.1% and its total asset purchase program—an important tool to stimulate the economy and ensure yields remain low—at £895 billion pounds ($1.2 trillion) for the year.
Reduced growth amid a more optimistic outlook later this year is the primary takeaway from the February rate decision by the Bank of England Monetary Policy Committee. This implies a slower pace of growth near 5% in 2021 followed by a rapid rebound closer to 7% in 2022. Moreover, the central bank does not intend to tighten policy until there is significant improvement in the economic outlook, as labor slack and considerable uncertainty around the evolution of the pandemic warrants effective zero-interest-rate policy that supports households and businesses. While inflation remains muted as the impact of the pandemic continues to extract a powerful toll on domestic demand, the MPC expects inflation to return to its 2% target over the next three years.
The Bank of England chose to maintain its policy rate at 0.1% and its total asset purchase program—an important tool to stimulate the economy and ensure yields remain low—at £895 billion pounds ($1.2 trillion) for the year. Perhaps just as important, the bank signaled that while it would not rule out the utilization of nominal negative-interest-rate policy; while the implementation of that policy is not imminent, banks should have a plan in case such a move is necessary.
The bank is also planning to ascertain the suitability of implementing tiered rates or central bank policy of separately targeting the interest rate on loans and the interest rate on deposits in order to provide economic stimulus. Given fiscal fatigue that followed the policy response to the Great Financial Crisis, we believe this is prudent and provides the central bank with an alternative set of policies to complement nominal negative interest rates should the fiscal authority turn to austerity measures in the post-pandemic economy.
Our base case remains that the economy has declined back into recession in the current quarter and will move back into recovery later this year followed by a rapid economic expansion in 2022. We expect that the primary catalyst for that expansion will be the U.K. household, which has lifted its current rate of savings to 16.7%, compared to the 20-year, pre-pandemic level of 8.4%. The forward-looking components of the decision imply that the pace of asset purchases will remain around £4.4 billion per week until the end of March, and then slow to roughly £3.4 billion every seven days thereafter. In our estimation, the central bank will want to ascertain the level of risk appetite across markets and err on the side of caution when it comes to reducing its asset-purchase program.
One thing is certain. The last two decades of crisis have taught us a crucial lesson when it comes to policymaking during a crisis: Be prepared to act boldly and decisively, and then sustain policy longer than most would be comfortable. The Bank of England has entered that last phase during the current crisis. It should be prepared to maintain an elevated pace of asset purchases, which have more than doubled compared to its 2019 level.