Bank of England Deploys More Stimulus as Lockdown Begins
LONDON (AP) -- The Bank of England has increased its monetary stimulus by a bigger than anticipated 150 billion pounds ($195 billion) as it tries to boost the economy through new lockdown measures.
In a statement released Thursday, the bank's rate-setting panel warned that the economy is set for another downturn in the winter but said a recession — two straight quarters of contraction — may be avoided. It said the outlook for the economy remains “unusually uncertain.”
A four-week lockdown began Thursday in England that will shut all shops selling items deemed non-essential, such as books and clothes. The other nations of the U.K. — Scotland, Wales and Northern Ireland — have also announced wide-ranging restrictions on economic activity.
The latest measures will weigh on an economy that had been recovering from the sharp recession caused by the spring lockdown. During the earlier lockdown, the British economy contracted by around a quarter. It recouped some of that during the summer, though the bank said it was still 9% smaller than its pre-COVID level at the end of the third quarter.
In a set of new forecasts, the central bank said it now expects that recovery to end and the economy to shrink 2% in the fourth quarter before rebounding at the beginning of 2021 — assuming the restrictions start to be lifted. As a result of the latest contraction, it now doesn't expect the British economy to reach its pre-COVID level until the first quarter of 2022.
The increase in the bond-buying program was bigger than the 100 billion pounds anticipated in financial markets and is aimed at keeping borrowing rates low to boost lending and ensuring that money keeps flowing through the financial system.
“We believe there is value in acting quickly and strongly to support the economy and avoid the risks of any short-term disruption,” Bank Governor Andrew Bailey told reporters.
The nine-member Monetary Policy Committee, which also unanimously kept its main interest rate at the record low of 0.1%, welcomed the decision by the government to extend the salary support program has been in place since March. Treasury chief Rishi Sunak is expected to outline on Thursday further government support for the economy.
The panel said the extension of the Job Retention Scheme, which sees the government paying 80% of the salaries of workers retained by firms rather than made redundant, should “mitigate significantly” the impact of weaker economic activity on the labour market. It expects the number of people on furlough to more than double in November to 5.5 million.
Though the furlough program prevented mass unemployment earlier this year, the jobless rate has edged up from a four-decade low of 3.8% to 4.5%, with the likes of British Airways, Royal Mail and Rolls-Royce all laying off thousands.
On Thursday, supermarket chain Sainsbury's became the latest big company to announce hefty cuts. It said it will shed around 3,500 jobs as part of plans to permanently close its meat, fish and deli counters, as well as some of its Argos standalone stores.
Given the outlook, the Bank of England expects the unemployment rate to rise to a peak of 7.75% in the second quarter of next year.
In addition to uncertainty relating to the pandemic, the Bank of England said much of the outlook will hinge on "the nature of, and transition to the new trading arrangements between the European Union and the United Kingdom.”
Though the U.K. left the bloc on Jan. 31, it is in a transition period that sees it remain within the EU's tariff-free single market and customs union until the end of this year.
A trade deal would ensure there are no tariffs and quotas on trade in goods between the two sides but there would still be technical costs, partly associated with customs checks and non-tariff barriers on services.