Cascade Commentary

Bank Rate maintained at 0.10% with additional £100bn of monetary support

July 2020

At its June 2020 meeting, the Monetary Policy Committee (MPC) voted to maintain Bank Rate at 0.10% and voted 8-1 to increase the target stock of purchased UK government bonds, financed by the issuance of central bank reserves, by an additional £100bn to take the total stock of asset purchases to £745bn. The MPC sets monetary policy to meet a 2% inflation target, doing so in a way that helps to sustain growth and employment. Covid-19 has created severe economic and financial disruption that has increased uncertainty. Any recovery is critically dependent on the spread of the disease and any measures taken so as to protect public health, evoking an unusually unpredictable outlook for policymakers.

The economic legacy of Covid-19 is slowly emerging. Nearly £50bn has been borrowed in state-backed loans. UK GDP contracted by circa 20% in April 2020 following a 6% fall in March 2020 as the public was told to remain home to save lives. As social distancing methods have been relaxed, a gradual uplift in consumer spending occurred in May and June while housing activity has also started to pick back up. At the moment, unemployment levels remain at 3.9% in the three months to April 2020 but policymakers remain nervous at the true impact once furlough support is gradually tapered later this year. Such job uncertainty is having an impact on consumer spending with many households stockpiling cash in case of future economic difficulties.

Inflation has declined year-on-year from 1.5% in March 2020 to 0.8% in April 2020 and 0.5% in May 2020. At such levels the Governor of the Bank of England is required to formally write to the Chancellor to explain the deviation from the 2.0% target. In doing so, Andrew Bailey outlined that the decline was largely due to the impact of business closures and households remaining at home during lockdown. In addition, a global oil price fall has also contributed to inflation dropping lower through the direct reduction in the cost of motor fuel and the indirect reduction in input costs for certain sectors of the economy. 

Policymakers are predicting that the fall in global and UK GDP in Q2 2020 will be less severe than first thought in the May 2020 report, but the true impact is difficult to predict at this stage. While social distancing measures have been relaxed somewhat, many businesses continue to work from home and many households are continuing to avoid pubs, restaurants and non-essential shopping. This coupled with higher and more persistent unemployment in the UK as the Coronavirus Job Retention Scheme comes to an end is resulting in greater market sensitivity, and of course greater uncertainty around the future economic trajectory of the global and domestic economy.

The MPC has judged that further easing of monetary policy is appropriate in its efforts to stimulate economic activity through lowering the price of borrowing for both households and businesses. In doing so however, savings rates fall too as policymakers try to incentivise investment and spending as opposed to savings. The MPC next meet on 6th August 2020 and we will closely monitor the situation to report on any further action taken in efforts to support the economy while ensuring a sustainable return to the 2.0% inflation target.

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