Base rate held but negative rates possible

Base rate held but negative rates possible
The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to leave the base rate unchanged at 0.1% in February but didn’t rule out rates falling below zero in future.

The base rate has been held at 0.1% as inflation, or the rising cost of living, is currently well below the government’s 2% target. Keeping rates low should help support businesses and households as it means their borrowing costs will be lower.

The Bank said it planned to keep quantitative easing (QE), which is used to inject money directly into the economy mainly by buying large amounts of government bonds, at £895 billion. QE boosts demand for bonds, which helps keep business loan rates and mortgage rates low, benefiting homebuyers and those looking to remortgage.

Whilst the Committee’s minutes said that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be “appropriate to start the preparations to provide the capability to do so if necessary in the future.”

Find out what negative interest rates in future could mean for your mortgage here.

Positive outlook

Although the Committee acknowledged that the outlook for the economy currently remains “unusually uncertain” it said that vaccines should help the economy recover “rapidly” later this year. Once restrictions to control the spread of the virus begin to be lifted, this should encourage people to become more confident about spending.

The economy is expected to contract by 4.2% in the first three months of the year but should start to rebound after this as lockdown measures are eased.

Inflation should start to return to the 2% target later this year, as the effects of lockdown restrictions begin to fade. However, the Committee said that it would continue to monitor the situation closely and if the outlook for inflation weakens it “stands ready to take whatever additional action is necessary to achieve its remit.”

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