The Bank of England kept interest rates unchanged and cut the forecast for economic growth

The Bank of England announced that it will keep interest rates at a record low of 0.1%, which all 9 committee members unanimously gave their votes for. It was also unanimously decided to keep the volume of bond purchases at £895 billion. Going forward, the committee leaves the doors open for rate cuts if necessary. All decisions fully meet the expectations of economists.

Economic growth forecasts were lowered. The monetary regulator expects GDP to contract in the first quarter after the UK government tightened restrictions to prevent the spread of COVID-19. For the whole of 2021, the forecast for GDP growth was also revised downward to 5% from 7.25% three months earlier.

In the regulator statement, it’s indicated that the banks may prepare for negative interest rates. However, Andrew Bailey was quick to reassure that this point isn’t a signal for the market. The monetary regulator hints that this is possible in the future, but there is no such need for it in the immediate future. Negative interest rates are being considered, but a multi-tiered lending system is being developed to apply them. A similar program has been implemented in the ECB, according to which individual credit institutions can avoid negative rates.

Sterling jumped as the market doesn’t see the integration of negative rates anytime soon. The options market has cut rates for an additional cut of interest on lending in half. After the announcement of the decision, the pound reached 1.3650. At the time of writing, the sterling was trading higher around 1.3678. Gilts' yield increased sharply by 46 basis points and comes up to 0.418%.

by Justforex, 2021.02.04

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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