(Alliance News) -Â The Bank of England on Thursday said it can expand asset purchases further if needed, as the UK central bank held interest rates at a record-low level.
The Monetary Policy Committee voted unanimously to keep the Bank Rate at 0.1%, having cut it by 15 basis points in a special meeting last week. The MPC also voted to continue with its GBP200 billion programme of bond purchases, taking the total stock to GBP645 billion.
Between the special meetings held March 10 and March 19, there was a "significant further tightening" in financial conditions, both globally and in the UK, the Bank noted, amid disruption from the Covid-19 pandemic.
At last week's emergency meeting, the bank judged that a "further, comprehensive package" was necessary. This led the MPC to announce an additional GBP200 billion in asset purchases.
"The committee also discussed whether to reduce Bank Rate at this meeting. Given the likely scale of the economic shock from Covid-19, a further cut in Bank Rate would help to support business and consumer confidence, to bolster the cashflows of businesses and households, and to reduce the cost, and improve the availability, of finance," the MPC said.
Bank Rate had already been slashed to 0.25% from 0.75% at the March 10 meeting, but was then reduced further to 0.10%.
The UK central bank on Thursday warned that the spread of Covid-19 and the measures needed to contain it have "evolved significantly".
"The economic consequences of these developments are becoming more apparent and a very sharp reduction in activity is likely. Given the severity of that disruption, there is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment," the MPC said.
Many people will be unable to work for a period and lots of consumer-facing companies are having to cease operations temporarily, while other businesses scale back.
"Household spending on social activities and other delayable forms of consumption is likely to decline materially. In an environment of heightened uncertainty, businesses are likely to postpone investment decisions. Exports are likely to weaken. These effects on economic activity will be offset partly by temporarily higher spending on essential goods and services. Nonetheless, business cashflows will be severely affected in a way that, without support measures, would threaten material numbers of businesses failing, and large and persistent rises in unemployment," said the MPC.
Due to a sharp fall in oil prices, inflation is likely to fall below 1% in the second quarter of this year, which would require the governor - Andrew Bailey, who became head of the bank less than two weeks ago - to write a letter to the UK chancellor.
The BoE said it will continue to monitor the situation "closely" and stands ready to respond further to act against an "unwarranted tightening" in financial conditions, and to support the economy.
"Regarding the impact of asset purchases, gilt yields had fallen significantly following the previous week's special MPC meeting and the commencement of additional gilt purchase operations from 20 March. If needed, the MPC could expand asset purchases further," the MPC added.
By Lucy Heming;Â email@example.com
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