The Bank of England’s Monetary Policy Committee has voted to hold interest rates at their record low of 0.1 per cent for another month.
However, markets are still pricing in a one in four chance of a rate cut next year and the possibility of negative interest rates is still on the cards.
AJ Bell financial analyst Laith Khalaf says: “The Bank of England won’t make its next move until it knows which way Brexit is heading.
“In the event of no-deal, it would likely be willing to look through the temporary jump in inflation as a result of weaker sterling and the imposition of tariffs, but it couldn’t turn a blind eye to the economic impact of a disorderly Brexit.
“The Bank’s governor has said no deal would have a greater long-term economic effect than the pandemic, so we can expect further stimulus should Brexit talks fail, either in the form of more quantitative easing, or interest rate cuts.
“On the latter, the Bank is already flirting with its effective lower bound, and there has been a chorus of groans from high street banks about the prospect of negative rates.
“Of course, aside from Brexit there is the ongoing economic damage of the pandemic to consider and that in itself may prove worthy of further stimulus.
“Despite the boost in confidence provided by vaccines, markets are pricing in a one in four chance of a rate cut in 2021, which would leave rates at zero, or below.”
Redburn chief economist Melissa Davies says: “The Bank of England kept a steady course today in the face of a weaker growth outlook than hoped for and inflation now dangerously close to zero.
“The tug of war between vaccine hopes and lockdown realities will likely continue well into 2021, with the adjustment to new trading relationships adding an extra layer of complexity.
“Big ideas are going to be needed to revive the UK economy in the coming quarters and the MPC will have to get their thinking hats on. “Negative rates, targeted lending incentives, more asset purchases and increased cooperation with the Treasury could all feature.”
