Bank of England holds rates but warns of 'unusually uncertain' outlook

  • After plunging a record 20.4% in the second quarter to officially enter recession, the U.K. economy saw signs of recovery with a 6.6% monthly expansion in July.
  • Despite stronger-than-expected domestic economic data in recent months, the central bank said the economic outlook remains "unusually uncertain."

LONDON – The Bank of England on Thursday left interest rates unchanged and maintained its current level of asset purchases, but warned that the outlook for the economy remains "unusually uncertain."

All members of the Monetary Policy Committee (MPC) voted to keep the main lending rate at 0.1%, with the central bank having cut rates twice from 0.75% since the beginning of the pandemic. The MPC also voted unanimously to maintain target for the total stock of its bond purchases at £745 billion ($960.8 billion).

Sterling was trading around 0.5% lower against the dollar shortly after the announcement.

Britain faces concurrent risks of a no-deal Brexit, a spike in coronavirus cases leading to the reintroduction of some social restrictions, and the end of the government's furlough scheme next month, which had supported millions of dormant workers during the pandemic.

After plunging a record 20.4% in the second quarter to officially enter recession, the U.K. economy saw signs of recovery with a 6.6% monthly expansion in July, after nationwide lockdown measures were gradually lifted.

However, a spike in cases to more than 3,000 per day has forced the government to implement new rules on social gatherings and implement localized lockdowns in certain regions, casting doubt over the country's recovery.

"The recent increases in Covid-19 cases in some parts of the world, including the United Kingdom, have the potential to weigh further on economic activity, albeit probably on a lesser scale than seen earlier in the year," the Bank said in its summary.

It added that there remains a risk of a "more persistent period of elevated unemployment than in the central projection."

Despite stronger-than-expected domestic economic data in recent months, the central bank said the economic outlook remains "unusually uncertain," as its central assumptions include a free trade deal with the European Union coming into effect on January 1 and a gradual dissipation of the impact of Covid-19.

The MPC also said it does not intend to tighten monetary policy until there is "clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably."

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