Bank of England Set to Keep Stimulus With Wary Eye on 2021
Bank of England Set to Keep Stimulus With Wary Eye on 2021
(Bloomberg) -- Bank of England policy makers make their final scheduled decision of the year on Thursday as uncertain as ever whether the U.K. will get a post-Brexit trade deal.
With the path of the latest pandemic lockdowns also unclear, it means Governor Andrew Bailey and his colleagues are likely to keep policy unchanged for now, but stand ready to react swiftly should the economic outlook deteriorate.
Economists surveyed by Bloomberg predict the benchmark interest rate will stay at 0.1% and the bond-buying program at 895 billion pounds ($1.2 trillion).
The nine-member Monetary Policy Committee increased its bond-buying target by 150 billion pounds just last month, and stressed that officials have plenty of room to do more. Here are the key issues they face.
Big Contraction
Britain suffered its worst economic collapse in centuries when the coronavirus struck. Now that businesses are again being forced to shut to curb infections, the BOE expects another contraction in the fourth quarter and doesn’t see output returning to pre-pandemic levels until 2022.
The rollout of vaccines has given hope that life can return to normal next year. But it could still take months to get there, and far longer to overcome the economic scars.
Brexit Rollercoaster
Exacerbating those woes, the U.K. continues to grapple with the considerable uncertainty about what will happen when the country leaves the European Union’s single market on Jan. 1. Negotiators have repeatedly run past deadlines for the talks, leaving companies in the dark about what they’ll need to keep doing business.
Bets on whether the BOE will add to stimulus rise and fall with the perceived prospects of a trade deal.
Market Ructions
The BOE says it will do what it can to support the economy, regardless of the Brexit outcome, and is even studying whether it could implement negative interest rates. But it also says monetary policy can’t prevent long lines of trucks at the border for customs checks.
The central bank’s main contribution would be to keep markets functioning smoothly and borrowing costs low amid any turmoil in the real economy. That helps banks keep lending and, critically, allows Chancellor of the Exchequer Rishi Sunak keep borrowing to fund fiscal aid.
Unemployment Rising
Even with authorities’ best efforts, unemployment will continue to rise. The BOE sees the jobless rate climbing to about 7.5% next year. The Office for Budget Responsibility sees it above 10% in a downside scenario.
Long-Term Scars
Brexit and Covid-19 are a brutal double whammy -- Bloomberg Economics predicts an 8% dent in long-term growth even if the U.K. leaves the single market with a trade agreement. Leaving without a deal would compound the loss by another 2%.
“The path of negotiations between the U.K. and the EU on a post-Brexit trade deal will determine the outcome of the BOE’s meeting,” said Bloomberg Economics senior U.K. economist Dan Hanson. “If talks breakdown then the central bank is likely to announce an increase in the pace of asset purchases to guard against any market disruption.”
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