As many countries around the world grapple with collapsing economies whilst trying to get some sort of a recovery process underway, it appears that UK is facing a particularily difficult road ahead. The Bank of England has announced it will explore the possibility of allowing interest rates to slip into negative territory.
The Bank of England’s Monetary Policy Committee has recently unanimously voted to keep the bank’s interest rate at a record-breaking 0.1%, as the threat of rising coronavirus infections continues to further impede economic activity. Although the UK has slightly recovered from its historic downfall during the spring season, a recent spike in cases suggest that the government may have to reimpose lockdown restrictions that were lifted during the summer.
If in fact additional social distancing and lockdown orders are reintroduced, then the trajectory of UK’s economic recovery will further slip into the unknown. Not only is the country suffering from an economic fallout as a direct result of the pandemic, but the post-Brexit landscape that is to become evident beginning in 2021 will also come with its own set of difficult challenges. The UK is currently undertaking trade discussions with the EU, but if relations between the two worsen, then country will likely face various trade impediments and tariffs.
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Since the onset of the pandemic, the UK was the subject of the worst recession in the world, with July’s GDP levels still remaining 12% below the pre-pandemic levels of February. As a result, England’s central bank unleashed a bond-buying program and cut interest rates to near-zero in order to uphold what was left of the UK economy. However, it appears that the economy has not been able to climb out of the deep recessionary rut, prompting the Bank of England to explore the possibility of negative interest rates in order to make cash hoarding less attractive,
The bank’s policymaking panel revealed that it would consider taking additional action with regards to borrowing costs, after members were briefed on the dynamics of implementing negative interest rates. It is expected that further discussions will reconvene in the fourth quarter, once more economic data becomes available. Although it is unlikely that a further rate reduction would occur this fall, the possibility of such an occurrence would increase come next year.
Information for this briefing was found via The Bank of England. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
