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The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 3 February 2021, the Committee judged that the existing stance of monetary policy remains appropriate. The MPC voted unanimously to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion. The Committee voted unanimously for the Bank of England to continue with its existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.
The Committee’s projections for activity and inflation are set out in the accompanying February Monetary Policy Report. Covid-19 (Covid) vaccination programmes are under way in a number of countries, including the United Kingdom, which has improved the economic outlook. Nevertheless, recent UK and global activity has been affected by an increase in Covid cases, including from newly identified strains of the virus, and the associated reimposition of restrictions. The United Kingdom and European Union also announced a trade agreement, which has applied since 1 January 2021.
Global GDP growth slowed in 2020 Q4, as a rise in Covid cases and consequent restrictions to contain the spread of the virus weighed on economic activity. Since the MPC’s previous meeting, financial markets have remained resilient.
UK GDP is expected to have risen a little in 2020 Q4 to a level around 8% lower than in 2019 Q4. This is materially stronger than expected in the November Report. While the scale and breadth of the Covid restrictions in place at present mean that they are expected to affect activity more than those in 2020 Q4, their impact is not expected to be as severe as in 2020 Q2, during the United Kingdom’s first lockdown. GDP is expected to fall by around 4% in 2021 Q1, in contrast to expectations of a rise in the November Report.
Labour market indicators remain difficult to interpret. The LFS unemployment rate rose to 5.0% in the three months to November, but other indicators suggest that labour market slack has remained higher than implied by this measure. The Government’s employment support schemes are likely to limit significantly the immediate rise in unemployment. A further increase in unemployment is projected over the next few quarters. Average Weekly Earnings growth has been notably stronger than expected in the November Report, although this may overstate underlying pay growth.
GDP is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination programme is assumed to lead to an easing of Covid-related restrictions and people’s health concerns. Projected activity is also supported by the substantial fiscal and monetary policy actions already announced. Further out, the pace of GDP growth slows as the boost from these factors fades. Spare capacity in the economy is eliminated as activity picks up during 2021.
Twelve-month CPI inflation rose from 0.3% in November to 0.6% in December. The weakness of recent outturns largely reflects the direct and indirect effects of Covid on the economy. CPI inflation is expected to rise quite sharply towards the 2% target in the spring, as the reduction in VAT for certain services comes to an end and given developments in energy prices. In the MPC’s central projection, conditioned on the market path for interest rates, CPI inflation is projected to be close to 2% over the second and third years of the forecast period.
The outlook for the economy remains unusually uncertain. It depends on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments.
The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.
At this meeting, the Committee judged that the existing stance of monetary policy remains appropriate.