Bank of England Holds Interest Rate at 0.01%
Last week, The Bank of England came out with a positive outlook on the economy, holding the interest rate at 0.1%. There were rumours of a negative interest rate, but experts believe such a move would not be ideal at the moment. While negative rates will definitely encourage lending, they may come across as a rather desperate move at a time when the economy might well recover without such drastic measures.
Thanks to the vaccination programme's increasing success, the economy is on its way to recover to pre-COVID levels by the end of this year. The Monetary Policy Committee (MPC) held the QE program at £895 billion. And the committee projects rising economic activity by the middle of the year as lockdown restrictions are lifted and life returns to normal.
Why Low Interest Rates?
The motivation behind lowering interest rates is to encourage banks to lend more money. This would encourage businesses to borrow money from banks to boost their business activity. A lower interest rate also discourages people from saving money, resulting in increased spending and more economic activity. The BoE hopes the vaccination program will continue its success and life will get back to normal as soon as April 2021.
The January Lockdown
As the UK went into a third lockdown last month, the services sector took a major hit. The January Index dropped to 39.5 from 49.4 in December 2020. It remains to be seen how the government will protect these jobs. The March budget will likely give some relief to people working in the services sector. Chancellor Rishi Sunak presents the budget on the 3rd of March, so that should bring some clarity as to how the government intends to move forward.
Problems on the Brexit front are also not helping matters. the UK was expected to enter into a free trade agreement shortly after January 1, 2021. While the transition has been largely successful, businesses have reported major transport disruptions at different borders. This, coupled with the pandemic, has resulted in a highly uncertain economic environment.
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