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The Bank of England signalled it could ease if no trade deal with the European Union is greed before the United Kingdom's transition period finishes at the end of this year, but its Monetary Policy Committee was unanimous in leaving policy on hold at its December meeting.
The MPC did not discuss negative interest rates or the outcome of the Bank's consultation with banks on the matter at the meeting, it said. Its only change to its policy tools was to extend by six months its bank funding scheme with incentives for lending to smaller firms. It left conditions on the TFSME scheme unchanged, with lending rates at or just above Bank Rate.
While pushing the negative rate debate into next year, the Bank delivered a clear message regarding its readiness to act if negotiations between the EU and the UK for a post-Brexit trade deal were to break down. A no deal Brexit would likely see sterling fall heavily but the MPC made clear it would look through the consequent inflation spike in setting policy.
If "trade negotiations did not reach an agreement, the exchange rate would probably fall and … CPI inflation would be likely to be higher and GDP growth weaker," it stated in the minutes. But, compared to previous periods "the economy was starting from a weaker position with greater spare capacity, increasing the Committee's tolerance for a temporary overshoot in inflation," it said.
The minutes noted that even with an EU deal, firms were anticipating disruption in the first quarter, as a combination of Covid and the practical problems of preparing for new, unspecified trading arrangements ensured that supply chains would be affected.
"Recent congestion at ports … could compound the risk of short-term disruption emerging after 1 January 2021," the minutes said.
The minutes highlighted the uncertainty, and the lack of agreement among MPC members, regarding the net effect in the near term of the news that mass vaccination was on its way.
Some businesses and consumers could respond by holding back on investment and social spending until the vaccination became reality. Others could react to increased confidence that the economy was more certain to pick up down the line by bringing forward spending.