The CBI announced this morning that the Monetary Policy Committee (MPC) had decided to lower the CBI’s policy rate by 0.25 percentage points. The key interest rate – the rate on seven-day term deposits – will therefore be 0.75%. With this decision, the key rate has now been lowered by 2.25 percentage points thus far in 2020, from 3.0% at the turn of the year.
The rate cut announced today took most observers by surprise, as official forecasters (including ourselves) had expected no change. That fact alone – that few expected the CBI to respond in this way to the third wave of the COVID pandemic and the resulting deterioration of the short-term outlook – gives rise to questions on how clear the MPC’s forward guidance has been in the recent term. This is reflected in both the widely held expectation of an unchanged policy rate and the recent surge in long-term expectations in the bond market, which continued until just a few days ago.