The Bank of England is set to make an important decision this Thursday on whether to take further action as the UK is on the verge of a double-dip recession.
Most economists believe the bank will keep rates at 0.1%, but could try to expand its £ 895 billion QE bond purchase program to help the economy ride through a second wave of the Survive pandemic.
The bank is expected to update its consultation on the feasibility of negative interest rates in the UK after speculation about whether it could resort to it.
This final lockdown is expected to result in a decline in gross domestic product (GDP) in the first quarter of this year.
This puts the UK on the verge of its first double-dip recession since the 1970s.
However, some experts believe the UK might just barely avoid going back into recession.
The EY Item Club’s most recent winter forecast predicted that GDP may have flattened in the fourth quarter, which would mean the UK is dodging the recession, as defined by two quarters in a row of falling GDP.
Howard Archer, an economist at the Item Club, said he believed the bank’s rate setters could “see through” the current lockdown hit on Thursday’s rate decision and put other measures – and certainly negative rates – in the background.
He said, “We wouldn’t rule out the bank trading, and if it does, I think it would be done through another dose of asset purchases.
“However, I think the chances are the MPC (Monetary Policy Committee) is tight and taking a wait and see approach.”
He added that the launch of the vaccine, along with the government’s attempt to hit a Brexit deal, reduced longer-term risks to the economy.
“The bank will be more likely to overlook the very challenging first quarter and focus more on the brighter prospects from the second quarter onwards,” he said.
For the first time in the bank’s history, the potential for negative interest rates has been increasingly focused, as few options remain to strengthen the economy.
While some MPC members have advocated subzero rates, the committee remains divided on this issue. Comments from Governor Andrew Bailey suggest he is unwilling to go that route.
It is believed that adding additional QE for now could be a less risky tactic with fewer unintended consequences.
With official fourth quarter GDP figures not due until February 12, the bank’s quarterly economic forecasts for the next week are being closely monitored.
Investec economist Philip Shaw said he believes performance during the November lockdown will provide the bank with “a modest level of comfort in terms of the extent of downside risks to the economy.”
The latest official unemployment figures also showed that the unemployment rate hit 5% for the first time in more than four years, but the government’s vacation program is helping to cushion the blow.
“Still, we wouldn’t be surprised if the Bank of England closed an insurance policy at its next meeting on February 4th and accelerated the pace of QE,” said Shaw.