Bank of England launches £150bn QE programme on first day of lockdown

The Bank of England’s Monetary Policy Committee (MPC) has extended its quantitative easing programme by £150bn to help shore up the economy as the second English lockdown begins and Brexit looms.

It also voted unanimously to maintain interest rates at 0.1%, despite speculation of a cut.

The extension of QE will take the total stock of government bond purchases to £875bn.

The Bank is tasked with setting monetary policy to meet a 2% inflation target, and in a way that helps to sustain growth and employment.

“The outlook for the economy remains unusually uncertain,” the MPC said in a statement.

“It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom.

“It also depends on the responses of households, businesses and financial markets to these developments.”

The Bank expects a decline in GDP in the final quarter of 2020, worsening its forecast from August. While it is then predicting household spending and GDP to pick up in the first three months of next year, it said the level of activity “is expected to remain materially lower than in 2019 Q4” – the last quarter unaffected by Covid-19.

It also said trade and GDP are “likely to be affected during an initial period of adjustment, over the first half of next year”, as Brexit happens.

Chancellor Rishi Sunak, writing in response to the formal letter from the Bank of England Governor Andrew Bailey to approve the QE extension, said: “We recognise the extreme disruption Covid-19 is causing for people’s lives, their businesses, their jobs and the nation’s economy, and further action now to protect the economy will ensure we are in the best possible place to recover once the health situation improves.”

Laith Khalaf, financial analyst at Manchester investment platform, AJ Bell, said: “The Bank of England has unleashed another £150bn of QE to help prop up the economy as it enters a second national lockdown. This may not be the end of the Bank’s pandemic interventions, particularly if another lockdown becomes necessary further down the line.

“The Bank is beginning to run out of dry powder as it now holds almost half the gilt market, and interest rates are already close to zero. That means if the central bank wants to boost the economy further, it may resort to even more extraordinary measures than we have today.

“Negative interest rates are certainly on the table. The Bank is seriously weighing this up and has written to bank chiefs to see if they can handle it. QE could also shift towards different assets, such as more corporate bonds, high yield bonds and even equities, as has happened in Japan.

“Much will depend on how the pandemic, social restrictions and the Government’s fiscal response proceed from here.

“For the moment markets are pricing in a 40% chance of an interest rate cut next year, and it’s fair to say that markets have consistently underestimated the capacity for monetary policy to loosen ever since the financial crisis.

“This is all terrible news for cash savers, who have endured more than 10 years of ultra low interest rates. £210bn now sits in cash accounts that don’t pay any interest, up from £26bn in 2008. A further £837bn is held in accounts paying on average 0.13%.

“This money is slowly but surely losing its buying power, even though inflation is currently so low. That won’t be the case for too long, as inflation is expected to move back towards two per cent in the first half of next year as lower energy prices fall out of the equation.

“Huge amounts of cash have been tucked away since the first national lockdown, to the tune of £88bn. Savers should make sure that money is working as hard as possible, by shopping around for the best rate and considering fixed term cash products which tend to offer more interest.

“For money that can be put away for 10 years or more, investors should think about drip feeding some money into the stock market, though it’s important to always keep a cash buffer for emergencies.

“The Bank of England is now forecasting an 11% drop in GDP in the last three months of this year. It then projects growth through next year, reaching pre-COVID levels by the end of the year, on the premise that social restrictions loosen and the pandemic’s impact on the economy begins to wane.

“Let’s hope they’re right, even though that looks like a heroic assumption right now.”