As we enter the seventh week of lockdown, the Bank of England’s Monetary Policy Committee (MPC) have released their quarterly report detailing the economic outlook for the economy, both domestically and globally, and how they are looking to navigate through these unprecedented times.
The MPC are an arm of the Governments Bank of England. They have the primary objective of keeping inflation low and stable in order to support growth and jobs in the UK. Presently, the goal is to experience inflationary returns to the Consumer Price Index (CPI) of 2%. In short, they aim to stimulate the domestic economy by two broad methods:
- Interest Rates – Controlling the interest rates that Banks and Building Societies earn on deposits. Lower interest rates encourage lower levels of saving and greater levels of spending, thus (hopefully) stimulating the domestic economy.
- Quantitative Easing (QE) – this is the process of buying Corporate and Government Bonds which, in turn, pumps money directly into the financial system.
Both methods have been necessary in try to combat the effects of the Coronavirus lockdown- with interest rates being slashed to 0.1% and an injection of £200 billion into the UK’s economy through QE. Even with these drastic measures- UK household consumption is down an estimated 30%, UK activity nose-diving and unemployment figures on the rise- the MPC estimate that the UK’s economy could shrink by up to 14% throughout 2020. With CPI falling 1.5% in March, their scenario modelling anticipates the remainder of 2020 as being a period of severe economic disruption. Nevertheless, they follow this up with an estimation that 2021 could bring economic growth of 15% to the UK.
Whilst this seems to be all “doom and gloom” there are some tentative signs of recovery to the UK economy. Rumours of lockdown easing and other countries slowly reducing lockdown, offers a glimmer of hope of a return to some form of normality. With economic activity slowly returning to China, they have suggested that their road traffic level and energy consumption are up to 90% their normal levels.
I think the main take home from the MPC’s report is one of uncertainty. Whilst their scenarios are run by sound assumptions, they are still assumptions and are never guaranteed. Ultimately, nobody knows what the true effect the COVID-19 pandemic will have on the UK and global economy and for how long these effects may linger. It all depends on how the government, individuals, businesses and financial system will respond as we move further along in the year.
MPA are continuing to monitor facets such as this in order to ensure our clients remain as up to date as possible. If you have any queries or concerned regarding this, or any other topic, please do not hesitate to contact you adviser here at MPA.
Should you wish to see the Monetary Policy Committees report and summary, then please find the link below: