Bank of England Holds Rates, Alert to Possible Slowdown in Recovery -- Update

By Jason Douglas and Paul Hannon

LONDON--The Bank of England kept policy on hold and signaled that it is prepared to take further action to support the U.K. economy if rising coronavirus cases undermine recovery.

The statement highlights how central banks are alert for any sign that a rebound this summer is losing steam as public-health worries re-emerge. Governments in some parts of Europe are imposing new restrictions on social interactions aimed at slowing resurgent coronavirus infections while avoiding a repeat of costly nationwide lockdowns imposed in the spring.

An additional risk for the U.K. is another looming Brexit deadline. Britain and the European Union have until the end of the year to agree a free-trade accord or severe disruption to crossborder trade, and progress in talks has stalled.

The pound fell 0.5% against the U.S. dollar and 0.4% against the euro as investors judged more stimulus was likely, possibly as soon as November.

Officials on the BOE's Monetary Policy Committee voted unanimously to keep the central bank's policy rate at a low of 0.1% and the target for its asset-purchases program at 745 billion pounds ($966 billion), the panel said in a statement Thursday.

The panel said increases in coronavirus infections in parts of the world including the U.K. "have the potential to weigh further on economic activity, albeit probably on a lesser scale than seen earlier in the year."

Officials said they are monitoring developments closely and stand ready to adjust policy to propel growth and bring inflation back to its 2% annual goal.

Some economists expect officials to increase their bond buying program before the end of the year, though minutes from the panel's September meeting show officials are still weighing the possibility of pushing interest rates into negative territory. The minutes record that policymakers were briefed on BOE staff's plans to explore how negative rates could be implemented in practice.

"This just makes it slightly more real for those like myself who were doubting the bank would ever go down this path," said Viraj Patel, a foreign exchange and global rates strategist at research firm Arkera.

Central banks have deployed multiple tools to combat the fallout from the coronavirus pandemic.

The Federal Reserve pledged to support the economic recovery by setting a higher bar to raise interest rates and by signaling it expected to hold rates near zero for at least three more years.

In new projections released Wednesday after a two-day policy meeting, all 17 officials who participated said they expect to keep rates near zero at least through next year, and 13 projected rates would stay there through 2023.

The Fed's rate-setting committee also revised its post-meeting statement to specify it would maintain rates near zero until it sees evidence of a tight labor market and inflation reaches 2% "and is on track to moderately exceed 2% for some time."

The European Central Bank on Thursday took fresh steps to support bank lending by lowering the amount of capital banks need to backstop loans. The ECB has since March announced some $3 trillion of stimulus designed to pin down borrowing costs for indebted governments in southern Europe and keep credit flowing.

Recent economic data have disappointed however, suggesting that confidence among the region's consumers and businesses is starting to wane, even though economic activity remains as much as 10% below its level at the start of the year.

--Caitlin Ostroff contributed to this article.

Write to Jason Douglas at [e-mail]