The Bank of England has said the rollout of a Covid-19 vaccine had boosted the UK’s economic outlook, but cautioned over the impact of tough tier restrictions and the threat of a no-deal Brexit.
The Bank said vaccine developments are likely to “reduce the downside risks” to the economic outlook and help lift some of the uncertainties facing households and businesses.
It added that it expects a less severe contraction of just over 1% in the fourth quarter as the economy has shown resilience despite the second lockdown in England.
But the Bank warned over uncertainties posed by a no-deal Brexit as the UK remains locked in eleventh hour talks to break the deadlock.
It signalled that further monetary policy action could be on the way in the case of a no-deal Brexit, saying its tolerance had increased for an overshoot of inflation.
The Bank also cautioned that tougher restrictions brought in since the second lockdown – including placing Greater London into Tier 3 – would mean a bigger-than-expected economic hit in December and weigh on the first quarter.
The Monetary Policy Committee’s last meeting of the year saw it vote unanimously to hold interest rates at 0.1%, while it also kept the Bank’s quantitative easing (QE) programme at £895 billion.
In minutes of the decision, the Bank said: “The outlook for the economy remains unusually uncertain.
“It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom.”
It added: “The positive news on vaccine trials, and plans for widespread rollout, were likely to support future UK and global activity.
“This would be expected to reduce uncertainty about the path of the economy, supporting future spending by households and companies.”
Bank policymakers will be watching the Brexit talks intently and economists say the Bank could launch emergency action before its next meeting in February if a deal is not reached.
In the December minutes, the Bank said: “Compared with previous periods during which non-negotiated Brexit outcomes had been possible, the
economy was starting from a weaker position with greater spare capacity, increasing the committee’s tolerance for a temporary overshoot in inflation.”
Samuel Tombs at Pantheon Macroeconomics said this was the “clearest indication yet that it would ease monetary policy further, in the event of no-deal”.
The outcome of Brexit talks will focus attention on the prospect of negative rates for the first time in the UK.
The Bank is assessing whether it can take rates below zero for the first time in the UK but has yet to report back.
Bank bosses also highlighted the challenges of such a move earlier this week, with Santander telling MPs it could take 18 months to adapt its legacy systems to negative rates.
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