BOE Maintains QE Plan, Extends Company Aid on Prolonged Crisis

The Bank of England kept its monetary stimulus unchanged as it awaits the outcome of trade talks between the U.K. and European Union, while saying the latest pandemic lockdowns will hit the economy at the start of 2021.

The nine policy makers, led by Governor Andrew Bailey, voted unanimously to hold their benchmark interest rate at 0.1% and their total asset purchase target at 895 billion pounds ($1.2 trillion).

They also decided to extend their loan program for businesses, called the Term Funding Scheme for Small and Medium Enterprises, by six months to Oct. 31 next year. That would help lending to the real economy, they said.

The decision comes two weeks before the Brexit transition period ends on Dec. 31, with the nation yet to strike a trade deal with the EU. The BOE’s Monetary Policy Committee has stressed that it has plenty of headroom to boost stimulus further — potentially including negative interest rates — if the outlook deteriorates.

The BOE’s economic projections assume the U.K. moves immediately to a free trade agreement with the EU on Jan. 1.

It also warned that restrictions after the latest lockdowns to contain coronavirus infections are tighter than assumed when they set those projections at their previous meeting in November, so will hit the economy harder than expected in the first quarter of 2021.

The central bank increased its bond-buying program by 150 billion pounds just six weeks ago to counter the fallout from the prolonged coronavirus crisis and the uncertainty hanging over the economy.

Britain is still reeling from its worst economic collapse in three centuries during the initial wave of the coronavirus struck. The BOE expects another contraction in the fourth quarter and doesn’t see output returning to pre-pandemic levels until 2022.

Optimism over a trade deal has climbed in recent days, with the European Union’s chief Brexit negotiator, Michel Barnier, saying Thursday talks with the U.K. have made good progress and officials cautiously predicting a deal within days. Still Barnier also warned that “last stumbling blocks remain.”

While bets on future interest rates cuts have been driven by potential for a no deal exit this month, there are limits to what the BOE can do to protect the economy. As Bailey noted last week, while the central bank still has room to buy more bonds and pump cash into the financial system, that won’t prevent long lines of trucks if borders are hardened.

The BOE, which has never cut interest rates below zero before, is also currently reviewing that option to see if it’s possible. A number of officials have signaled their openness to the policy in recent weeks, although most say a move isn’t imminent.

Read more…
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— With assistance by Fergal O’Brien, Lizzy Burden, and Lucy Meakin

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