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Interest rates on hold at record low of 0.1%

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Written by: Owain Thomas
07/05/2020
Bank of England makes no change to base rate as it warns of a sharp recession for 2020
Interest rates on hold at record low of 0.1%

The Bank of England has held its base rate at 0.1 per cent but warned that it expected a sharp recession in the first half of the year as a result of the coronavirus restrictions.

In its May monetary policy report, the bank noted that the spread of Covid-19 and the measures to contain it were having a significant impact on the United Kingdom and many countries.

“Activity has fallen sharply since the beginning of the year and unemployment has risen markedly,” it said.

“Economic data have continued to be consistent with a sudden and very marked drop in global activity,” it added.

However, the Bank of England also highlighted that there were some “tentative signs of recovery” in countries that were starting to relax restrictions and that financial markets had recovered in part.

And indicators of UK demand have generally stabilised, albeit at very low levels, in recent weeks after “unprecedented falls” during late March and early April.

Banking stability

The bank published a “plausible scenario” alongside the monetary policy report but added that the situation was highly volatile and there was great uncertainty.

Encouragingly, the central bank believes the core banking system has “more than sufficient” capital to absorb expected losses and that there will be capacity to provide credit to support the UK economy.

In its scenario, the bank is anticipating that overall economic activity (GDP) will fall by 14 per cent in 2020 but rebound by a similar amount in 2021, although it will not reach its pre-coronavirus size until the middle of next year.

Household spending is expected to follow a similar pattern to GDP, but consumer savings is anticipated to rise sharply this year but then fall back in the next two years.

This will have an impact on inflation, as will falls in oil prices, with inflation potentially hitting 0.6 per cent over 2020 as a whole and reaching zero at the end of the year.

Unemployment is predicted to double to around eight per cent in 2020 but return to around the pre-coronavirus position in 2022.

Business investment also declines very sharply in 2020, by around 26 per cent on average relative to 2019, but it then rises 19 per cent in 2021 and around 12 per cent in 2022.

The scenario also assumes the UK will complete an orderly free trade agreement with the European Union at the end of the year, however this is not certain and disagreements during negotiations have been public from both sides so far.

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