The Bank of England has warned that the rising rise in coronavirus infections and a lack of clarity about Britain̵
It said much of the lost output during lockdown had been recovered, but the outlook remained “unusually uncertain”.
The UK is still in a deep recession while Covid-19 infections are at their highest level since mid-May.
Referring to the uncertainty, the bank kept interest rates at 0.1%, a historically low level.
It added that it would continue its monetary support to the economy, but stopped short of increasing its bond buying program or lowering interest rates further.
What are interest rates?
If you are borrowing money, you usually have to pay a small fee set by the person lending to you. How high the fee – or interest rate – is depends on a “base rate” set by the Bank of England at meetings throughout the year.
The rate determines how much banks have to pay to borrow money, and it has a contagious effect on how much the bank charges consumers to borrow.
As the economy grows rapidly, the bank is trying to stop that overheating by raising interest rates and making it more expensive to borrow.
When the economy is sluggish, the bank’s base rate lowers lower borrowing costs and can encourage businesses and consumers to spend more.
The Monetary Policy Committee (MPC), which sets interest rate policy, said previous projections of economic recovery were “assuming an immediate, orderly transition to a comprehensive free trade agreement with the EU on 1 January 2021”.
Economic recovery would also depend on developments in the pandemic and measures taken to protect public health, the MPC said.
“The recent increases in Covid-19 cases in some parts of the world, including the United Kingdom, have the potential to offset economic activity, albeit probably on a smaller scale than seen earlier in the year,” it said.
The government has had to impose new social distance restrictions across England as rising cases have forced many areas into local lockdowns.
On Wednesday, the Prime Minister said the government was doing “everything in our power” to prevent yet another nationwide lockdown that could have “catastrophic” economic consequences for Britain.
The Bank of England said despite a stronger-than-expected recovery in the last few months, the economy was still approx. 7% less than at the end of last year.
Usually, if the economy does not grow strong enough, the Bank of England is considering lowering interest rates to encourage companies to invest and savers to spend.
However, interest rates are already close to zero after two emergency cuts in March.
Minutes from this month’s meeting show that the MPC discussed the use of negative interest rates to stimulate the economy. Last month, the bank’s governor, Andrew Bailey, seemed to rule this out, though he said negative interest rates remained in the “toolbox”.
If the interest rate is negative, the Bank of England charges deposits which it holds on behalf of the banks. It encourages banks to lend the money to business rather than deposit it.
- What are negative interest rates?
- What is the Bank of England interest rate exactly?
The bank also signaled that it did not intend to raise interest rates until “significant progress” had been made in bringing inflation back to the bank’s target of 2%. It is currently at a five-year low of 0.2%.
The bank said it did not expect inflation to return to target levels for another two years.
“We expect interest rates to be no higher than 0.1% for the next five years,” said Andrew Wishart, British economist at Capital Economics.