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The Bank of England kept interest rates at 0.1%, citing lack of clarity about the UK’s future trade relationship with the European Union and the course of the coronavirus pandemic as a cause for concern.
The bank said the recent increase in the rate of Covid-19 cases could “further affect activity”.
The economy has regained much of the output lost since the lockdown.
But the bank said the outlook remained “extraordinarily uncertain”.
The bank will continue its monetary support to the economy, Which is in the deepest recession ever. But it did not go as far as increasing the bond-buying program or lowering interest rates further.
The Monetary Policy Committee (MPC), which sets interest rate policy, said previous expectations for an economic recovery were “assuming immediate and orderly action for a comprehensive free trade agreement with the European Union on January 1, 2021”.
The MPC said that the economic recovery will also depend on the evolution of the epidemic and measures taken to protect public health.
It comes amid a sharp rise in cases of coronavirus, which has reached its highest level since mid-May.
In defense of new social distancing measures Wednesday, the prime minister said he was trying to avoid a second national lockdown that could have “catastrophic” financial consequences for the UK.
Negative rates
The Bank of England said that despite a stronger-than-expected recovery in the past few months, the economy is still about 7% smaller than it was at the end of last year.
Usually if the economy is not growing strong enough, the Bank of England will consider lowering interest rates to encourage companies to invest and savers to spend.
However, interest rates are already close to zero after two emergency rate cuts in March.
This month’s meeting minutes show that the Monetary Policy Committee discussed using negative interest rates to stimulate the economy. Last month, Governor Andrew Bailey appeared to rule this out, even though he said negative interest rates remained in the “toolbox”.
The bank also indicated that it does not intend to raise interest rates until “significant progress” is made in bringing inflation back to the bank’s 2% target. It is currently at its lowest level in five years at 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 more than 0.1% for the next five years,” said Andrew Weichart, British economist at Capital Economics.
