Bank of England keeps interest rates at 0.1% but warns on economic outlook

The Bank of England said the economic recovery remained on track but warned the outlook remained “unusually uncertain” after voting to keep its main interest rate unchanged at 0.1%.

Health concerns would continue to drag on the economy’s ability to rebound from the coronavirus lockdown and there was still the prospect of a steep rise in unemployment, the central bank’s monetary policy committee (MPC) said in its September report.

The central bank’s nine-strong interest rate setting committee also voted unanimously to maintain its £745bn quantitative easing (QE) programme, which has increased by £300bn since March and acted to keep long-term interest rates low for mortgages and government borrowing.

What is gross domestic product (GDP)?

Gross domestic product (GDP) measures the total value of activity in the economy over a given period of time. 

Put simply, if GDP is up on the previous three months, the economy is growing; if it is down, it is contracting. Two or more consecutive quarters of contraction are considered to be a recession. 

GDP is the sum of all goods and services produced in the economy, including the service sector, manufacturing, construction, energy, agriculture and government. Several key activities are not counted, such as unpaid work in the home. 

The ONS uses three measures that should, in theory, add up to the same number.

• The value of all goods and services produced – known as the output or production measure.
• The value of the income generated from company profits and wages – known as the income measure.
• The value of goods and services purchased by households, government, business (in terms of investment in machinery and buildings) and from overseas – known as the expenditure measure.

Economists are concerned with the real rate of change of GDP, which accounts for how the economy is performing after inflation.

Britain’s government statistics body, the Office for National Statistics, produces GDP figures on a monthly basis about six weeks after the end of the month. It compares the change in GDP month on month, as well as over a three-month period. 

The ONS warns that changes on the month can prove volatile, preferring to assess economic performance over a three-month period as the wider period can smooth over irregularities. 

The most closely watched GDP figures are for the four quarters of the year; for the three months to March, June, September and December.

The figures are usually revised in subsequent months as more data from businesses and the government becomes available.  

The ONS also calculates the size of the UK economy relative to the number of people living here. GDP per capita shows whether we are actually getting richer or poorer, by stripping out the impact of population changes. Richard Partington

City analysts said they expect the MPC to add a further £100m to its QE programme at its next meeting in November if the recovery from lockdown continues to be slow.

In a letter to the chancellor, Rishi Sunak, Bank of England governor Andrew Bailey said the MPC had held rates despite a sharp fall in inflation in August to just 0.2%.

The governor is required to write to the chancellor each time inflation is one percentage point above or below the 2% inflation target set by the Treasury.

In the letter, Bailey said: “The temporary cut in VAT for hospitality, holiday accommodation and attractions, together with the government’s “eat out to help out” scheme, were expected to lead to a material drop in inflation in August. These effects have transpired.”

He added that inflation was expected to stay low while office-based staff returned slowly to work and local lockdowns restricted economic activity.

But the MPC forecast a rise in GDP during the third quarter of 18%, showing it remains bullish that the impact of Brexit and the coronavirus will fade towards the end of the year.

Analysts said the central bank’s officials would be mindful of core inflation, which excludes volatile elements of goods and services in the inflation basket, and remained higher at 0.9% in August.

Andrew Wishart, an economist at the consultancy Capital economics, said: “As the MPC is wary of the side-effects of negative interest rates on banks, we think that will come in the form of a further £100bn instalment of QE (consensus £50bn).

“And in any case, with the MPC today repeating the guidance that it won’t tighten policy ‘until there was clear evidence that significant progress was being made in eliminating spare capacity and achieving the 2% inflation target’, we expect interest rates to be no higher than 0.10% for the next five years.”

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