The Bank of England warns of an 'unusually uncertain' outlook, and policymakers are keeping negative interest rates on the table
- The Bank of England warned of an "unusually uncertain" outlook for the UK economy, and policymakers said they would explore how negative rates could be implemented effectively.
- Rates remained unchanged near zero, as officials said they would continue to monitor the situation closely, and would not tighten monetary policy until inflation is on track to meet its 2% target.
- The bank said it would continue to work through its £745 billion bond-buying program.
- Policymakers suggested exploring negative rates later this year through "structured engagement" with the Prudential Regulatory Authority.
- The pound fell against the dollar to trade 0.7% lower on the day at $1.29.
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The Bank of England warned of an "unusually uncertain" economic outlook on Thursday as fears grow over rising unemployment and a potential no-deal Brexit.
Rates were unchanged at 0.1% as expected, but the central bank gave a clear signal that it would explore cutting interest rates below zero if required.
No further amendments were made to the bank's £745 billion ($960 billion) bond-buying program. The pound fell against the dollar to trade 0.7% lower on the day at $1.29.
Policymakers said they would hold "structured engagement" with the Prudential Regulation Authority — a body that polices financial services — later this year on how to implement negative rates.
The Monetary Policy Committee "had been briefed on the Bank of England's plans to explore how a negative bank rate could be implemented effectively, should the outlook for inflation and output warrant it at some point during this period of low equilibrium rates," published minutes of the meeting showed.
Bank Governor Andrew Bailey has previously said it would be foolish to rule out negative rates, after first dismissing the recent market precedent.
The pound fell against the dollar to trade 0.7% lower on the day at $1.29.
The bank has in some ways "been 'playing for time' – in that it had been hoping the economy will naturally rebound as we transition out of lockdown," said Giles Coghlan, chief currency analyst at Henyep Markets.
"As a result, money markets now bring forward the bets on UK interest rates turning negative. Negative rates could now be seen in Feb 2021 as opposed to the previous touted date of March 2021," he said.
When interest rates fall, bond prices rise and their yields tumble. Those holding negative-yield bonds stand to win big if the central bank suggests an openness to below-zero rates.
Despite a recent rise in business activity, bank officials expect economic output to be 7% lower in the third-quarter than at the end of last year.
As almost 750,000 jobs were lost and unemployment neared a 2-year high in July, officials expect further uncertainty in the labor market once the job support schemes end in October. "There remains a risk of a more persistent period of elevated unemployment" than the bank's previous forecasts, they said.
The Committee said it would "continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit," and confirmed there would be no tightening on measures until inflation is on track to meet its 2% target.
In similar moves, both the US Federal Reserve and the Bank of Japan kept interest rates steady, with the Fed indicating rates will stay near zero through 2023.