Bank of England Monetary Policy Decision on August 4, 2021
The Bank of England (BoE) on August 4, 2021, decided to:
· keep its policy interest rate, the Bank Rate (the rate of interest the BoE pays on deposits of banks held at BoE), unchanged at 0.10% (the lowest in the BoE history so far) and
· continue the relaxed monetary accommodation with the target of asset purchase of £895 bn and reinvestment of £16.6 bn of asset redemption proceeds of September 2021,
in order to further support the recovery of the economy from the Corona pandemic.
1) Present Policy Background
As the immediate response to the pandemic, two main policy instruments, among several others, implemented by the BoE are the cut in the bank rate to 0.10% and the increase in asset purchase up to £895 bn as highlighted below.
· Cut
in the Bank Rate – on 11 March 2020 from 0.75% to 0.25% and on 19 March 2020
further to 0.10%.
· Increase in Asset purchase – on 19 March 2020 to £645 bn (by £200 bn from £445 bn), on 18 June 2020 to £745 bn and on 5 November 2020 to £895 bn (total of £875 bn UK government bonds and £20 bn non-financial investment-grade corporate bonds).
·
Inflation
(consumer) target 2% (Annual)
2) Decision Background
·
Present
inflation is 2.5% between June 2020 and June 2021.
· The
BoE expects inflation to rise further in the near-term, to 4% in Q4 2021,
and then fall towards the target of 2% when the economy and supply chains recover
from the pandemic. Therefore, rise in inflation is temporary or transitory and
does not cause concerns over the present ultra-relaxed policy stance in view of
the pandemic impact.
·
Asset
purchase has reached £845 bn out of the target facility of £895 bn.
· The
BoE’s balance sheet has risen to £939.6 bn as of February 28, 2021 from £590 bn
as of March 31, 2020 reflecting a 59.3% increase in money printing to help fight Corona-hit-economy in 2020.
· Therefore,
further monetary policy accommodation is necessary to support the economic
recovery across all sectors.
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