A pedestrian shelters under a Union Flag umbrella in front of the Bank of England, London. Reuters/File

The Bank of England left its key interest rate and stimulus unchanged on Thursday, but slashed its 2021 growth forecast despite vaccines rollouts.

BoE policymakers voted to keep its main borrowing cost at a record-low 0.1 per cent following their first rates meeting since Britain’s divorce from the European Union at the start of January, The central bank also cut its 2021 growth forecast to 5.0 per cent from 7.25 per cent.

It said COVID-19 vaccination programmes around the world “has improved the economic outlook”.

“Nevertheless, recent UK and global activity has been affected by an increase in Covid cases, including from newly identified strains of the virus, and the associated reimposition of restrictions,” the BoE added in a statement.

It meanwhile signalled that Britain would likely avoid a so-called double-dip recession with marginal growth expected in the final three months of last year.

And again it hinted at the possibility of negative interest rates, saying it was “appropriate” to start preparations for adding such action to its monetary policy toolkit.

A negative interest rate would likely see retail banks further cutting their own borrowing costs, adding more pain to savers while boosting borrowers.

The BoE on Thursday added that the economy was about 8.0 per cent smaller in the fourth quarter than prior to the start of the pandemic in early 2020.

Britain’s economy would probably shrink by 4% in the first three months of 2021, the central bank said, but it was expected to recover rapidly towards pre-COVID levels over the year.

Over the past year, the BoE and UK government have pumped billions of pounds into the British economy to boost lending, stimulate growth and protect jobs amid the deadly pandemic.

The central bank on Thursday said it had maintained its quantitative easing stimulus programme at £895 billion ($1.2 trillion). The bank last altered the vast QE stimulus by £150 billion in November.

Britain’s banks would need at least six months to prepare for any cut in interest rates below zero, the Bank of England said on Thursday as it kept its stimulus programmes on hold ahead of what it hopes will be an economic recovery later this year.

The pound jumped by more than a cent against the US dollar and 10-year British government bond yields rose to their highest since March as investors heavily scaled back bets the BoE would implement sub-zero rates this year.

The British central bank said it would ask banks to get ready for the possibility of negative rates, but that financial markets should not view sub-zero borrowing costs as a foregone conclusion.

“Nobody should take any signal from this,” Governor Andrew Bailey told a news conference.

“My message to the markets is you really should not try to read the future behaviour of the MPC from these decisions and these actions we’re taking on the toolbox.”

Deputy Governor Sam Woods said most financial firms would need to make changes to their systems to implement a negative rate but cutting Bank Rate to zero would pose less of an operational challenge.

Most businesses are once again hobbled by Britain’s third national lockdown since the pandemic struck last year. The coronavirus crisis has hit the economy harder than any of the other Group of Seven rich nations, according to official data.

“With pent-up savings set to be unleashed later this year by consumers looking to make up for lost time, the likelihood of negative rates being implemented in the UK this year is reducing,” said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.

Many firms are also grappling with post-Brexit barriers to trade with the European Union after Britain left the bloc’s single market on Dec. 31.

Andrew Bailey said on Thursday that Britain’s economic performance compared with other countries during the COVID-19 pandemic was nowhere near as bad as official data has suggested.

Britain suffered the biggest real-terms drop in economic output of any Group of Seven rich nation between the first and third quarters of 2020, according to official figures, combined with one of the world’s highest COVID-19 mortality rates.

“Actually I think the UK’s performance is nowhere near as adverse ... as suggested by the headline numbers,” Bailey told broadcasters after the BoE kept its stimulus programmes on hold before an expected economic recovery later this year.

On Monday, the Office for National Statistics said some of Britain’s slump could be explained by the way the output of government services such as education and healthcare was measured and it was hard to make international comparisons.

Excluding government spending, Britain still experienced the most severe contraction in economic output between the first and third quarters of last year in the G7, although it lagged by much less on this measure, the ONS said.

Bailey said risks to the medium-term economic outlook and inflation had become more “two-sided”.

The BoE maintained its Bank Rate at 0.1% and left the size of its total asset purchase programme at 895 billion pounds ($1.22 trillion), as expected.