This week, the Bank of England voted unanimously to maintain interest rates on hold and revised upwards its GDP forecasts.

The Bank of England’s Monetary Policy Committee (MPC) has voted unanimously to maintain Bank Interest Rates at 0.1%; GDP is expected to rise sharply in the second quarter of 2021.

The Monetary Policy Summary reads: “Global GDP growth is likely to have slowed in 2021 Q1 as Covid-related restrictions weighed on economic activity, although growth appears to have been stronger than expected in the February Report. Covid vaccination programmes have progressed and picked up pace in many countries. Recently, however, new Covid cases have increased significantly in India and some other economies, leading to tighter restrictions.”.

GDP recovery

“UK GDP is expected to have fallen by around 1½% in 2021 Q1, less weak than was assumed in the February Report. New Covid cases in the United Kingdom have continued to fall, the vaccination programme is proceeding apace, and restrictions on economic activity are easing. Reflecting these developments, GDP is expected to rise sharply in 2021 Q2, although activity in that quarter is likely to remain on average around 5% below its level in 2019 Q4.

“GDP is expected to recover strongly to pre-Covid levels over the remainder of this year in the absence of most restrictions on domestic economic activity. Demand growth is further boosted by a decline in health risks and a fall in uncertainty, as well as announced fiscal and monetary stimulus. Consumer spending is also supported by households running down over the next three years around 10% of their additional accumulated savings. After 2021, the pace of GDP growth is expected to slow as the boost from some of those factors wanes. The level of activity is higher in each quarter of the forecast than in the February projections”.

Demand and supply, and employment

The report highlights the fall in activity over the past year has reflected “a decline in both demand and supply”. The unemployment rate fell slightly to 4.9% in the three months to February, but “it is likely that labour market slack has remained higher than implied by this measure”, the Committee said. Positively, the extension of the Government’s employment support announced in Budget 2021 is expected to limit the near-term rise in unemployment.

Inflation and economy

Twelve-month CPI inflation rose from 0.4% in February to 0.7% in March. As has been the case in recent MPC forecasts, inflation is projected to rise to close to the target in the near term as some of the covid-effects fade.
The report explains the outlook for the economy, and particularly the relative movement in demand and supply, remains uncertain as it continues to depend on the evolution of the pandemic.

“The Committee will, consistent with its policy guidance and as always, focus on the medium-term prospects for inflation, including the balance between demand and supply, rather than factors that are likely to be transient”.
The Committee has also highlighted it does not intend to tighten monetary policy until there is “clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”.

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