Interest rates: Bank of England ‘paralysed’ by Brexit negotiations – base rate unchanged

Bank of England 'needs to do more' in pandemic says expert

Interest rates are set to remain incredibly low for the foreseeable future as today, the Bank of England decided to keep the base rate at 0.1 percent, the lowest it has ever been. The announcement caught the attention of several experts within the field who noted the central bank if facing a unique set of circumstances.

Melissa Davies, the Chief Economist at Redburn, commented on how coronavirus is continuing to weigh on economic decisions: “The Bank of England kept a steady course today in the face of a weaker growth outlook than hoped for and inflation now dangerously close to zero.

“The tug of war between vaccine hopes and lockdown realities will likely continue well into 2021, with the adjustment to new trading relationships adding an extra layer of complexity.

“Big ideas are going to be needed to revive the UK economy in the coming quarters and the MPC will have to get their thinking hats on.

“Negative rates, targeted lending incentives, more asset purchases and increased cooperation with the Treasury could all feature.”

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This was expanded on by Paul Elliot, the Managing Director of Propp, who explained the potential impacts on mortgages: “At a time when lenders are already extremely cautious, negative interest rates would have had a huge knock-on effect on consumers, businesses and lenders across the UK.

“We have already seen some lenders that rely on retail savings forced to pause lending as savers have withdrawn their money during the pandemic.

“Any negative interest rate decision could see mortgage lenders restrict or remove tracker mortgages from their product offering which in turn removes some of the flexibility many borrowers enjoy, especially those products available without any early repayment charges.”

Aside from interest rate decisions, the Bank of England also lays out details for it’s Quantitative Easing (QE) programme, which has now reached £895billion (£875billion in gilts or government bonds and £20billion in corporate bonds).

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QE has been utilised by central banks all over the world and it is done, in theory, to boost economies and overall confidence.

Hinesh Patel, a portfolio manager at Quilter Investors, commented on the Bank of England’s decision to limit further easing: “Just as the Federal Reserve awaits news of a stimulus package, the Bank of England is stuck waiting for the Brexit negotiations to be resolved and as such have chosen to keep further stimulus on hold.

“It appears the BoE are paralysed to the outcome of a Brexit deal but still are still conscious as they seek to adapt where they can.

“But with much of the country under tier three restrictions, they are simply in wait and see mode before responding to any further economic threats.

“For just now they remain as accommodative as they have been throughout this year.

“Inflation is likely to be lower for longer, just like interest rates, and as such this loose monetary policy will be in place well into the recovery.

“But the Bank of England can’t solve every problem facing the economy.

“Interest rates will not prevent queues of trucks forming at ports, so it is now down to the government to achieve a deal and attempt to successfully roll out the vaccine.”

Hinesh concluded: “The economy faces long-term scarring, and the immediate events risk compounding the problems facing the UK economy.

“Andrew Bailey will need to use everything in his powers to get the economy going, but without the fiscal firepower from the Treasury it may quickly run out of room.”

The next base rate decision will occur on February 4.

By then, the UK should have fully left the EU with or without a deal and the outcome of this could have a dramatic impact on the central bank’s decision making.

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