Base Rate held but QE increased by £100 billion

The Bank of England Monetary Policy Committee (MPC) voted unanimously to hold the base rate at 0.1%. However, they also voted 8 to 1 in favour of increasing Quantitative Easing measures by purchasing an additional £100 billion of government stock taking the total level of asset purchases to £745 billion.

The Bank of England summary said:

Recent data indicates that the fall in global GDP in 2020 Q2 will be less severe than expected at the time of the May Monetary Policy Report. There are signs of consumer spending and services output picking up, following the easing of Covid-19 related restrictions on economic activity.

UK GDP contracted by around 20% in April, following a 6% fall in March. More recent evidence suggests that GDP started to recover thereafter. Payments data are consistent with a recovery in consumer spending in May and June, and housing activity has started to pick up recently.

Twelve-month CPI inflation declined from 1.5% in March to 0.8% in April, triggering the explanatory letter from the Governor to the Chancellor published alongside this monetary policy announcement. CPI inflation fell further in May, to 0.5%. Current below-target rates of CPI inflation can in large part be accounted for by the effects of the pandemic. The collapse in global oil prices has had direct effects on inflation, via the prices of motor fuels, and indirect effects by reducing input costs in other sectors of the economy. The sharp drop in domestic activity is also adding to downward pressure on inflation through increased spare capacity in most sectors of the economy.

The unprecedented situation means that the outlook for the UK and global economies is unusually uncertain. It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors.

The emerging evidence suggests that the fall in global and UK GDP in 2020 Q2 will be less severe than set out in the May Report. Although stronger than expected, it is difficult to make a clear inference from that about the recovery thereafter. There is a risk of higher and more persistent unemployment in the United Kingdom. Even with the relaxation of some Covid-related restrictions on economic activity, a degree of precautionary behaviour by households and businesses is likely to persist. The economy, and especially the labour market, will therefore take some time to recover towards its previous path. CPI inflation is well below the 2% target and is expected to fall further below it in coming quarters, largely reflecting the weakness of demand.

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