The Bank of England has kept interest rates at 0.1%, citing a lack of clarity as to the UK’s future trade relations with the European Union and the path to the coronavirus epidemic.
The recent rise in the Covid-19 case “could add weight to the activity,” the bank said.
The economy has recovered much of the lost output from the lockdown.
However, the outlook remains “unusually uncertain”, the bank said.
The bank will continue its financial support for the economy, which is in the deepest recession on record. This, however, prevents its bond-buying program or further reduction of interest rates.
The Monetary Policy Committee (MPC), which sets policy on interest rates, said previous estimates of economic recovery were “in line with the assumption that a free trade agreement with the European Union will be conducted immediately, in an orderly manner, on 1 January 2021”.
The economic recovery will also depend on the evolution of the epidemic and the steps taken to protect public health, the MPC said.
This comes amid an increase in coronavirus cases that have reached their highest level since mid-May.
Defending the new social distance move on Wednesday, the prime minister said he wanted to avoid a second national lockdown that could have “catastrophic” financial consequences for the UK.
The Bank of England says the economy was still about 7% smaller than at the end of last year, despite being stronger than expected recovery in the past few months.
In general, if the economy is not growing strongly, the Bank of England considers lowering interest rates to encourage companies to invest and save on interest costs.
However, interest rates are already close to zero after two emergency rate cuts in March.
The minutes of this month’s meeting show that the MPC has discussed the use of negative interest rates to stimulate the economy. Last month, the bank’s governor, Andrew Bailey, rejected the ruling, although he said negative interest rates remained “in the tool box.”
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The bank also indicated that it had no intention of raising interest rates until there was “significant progress” in bringing inflation back to the bank’s 2% target. It is currently at a five-year low of 0.2%.
The bank said it did not expect inflation to return to its target for another two years.
“We expect interest rates to be no higher than 0.1% for the next five years,” said Andrew Wishart, a UK economist at Capital Economics.
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