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The Bank of England voted to buy another £ 150bn in government bonds on Thursday in a bid to boost spending in the economy as England enters a second coronavirus lockdown.
After a unanimous vote in the central bank’s Monetary Policy Committee, the Bank of England will increase the total amount of quantitative easing from £ 745 billion to £ 895 billion over the course of 2021.
Andrew Bailey, the central bank governor, said the policy stimulus was decided after the “dramatic impact” of the coronavirus resurgence and restrictions to reduce infections across the UK. It is valuable to act “quickly and strongly,” he added.
The MPC said the action taken was in response to “signs that consumer spending has softened on a variety of high-frequency indicators, while investment intentions have remained weak.”
He forecast a double-dip recession for the UK following the coronavirus resurgence, with gross domestic product falling 2 percent in the fourth quarter of the year before recovering in early 2021 if the prevalence of the coronavirus has declined.
Policy makers said they expected the economy to slow down significantly in response to the second wave of Covid-19 and the restrictions, but to pick up again in the first quarter of next year.
There was no statement on how MPC members expected the additional money to boost spending when borrowing costs for government, businesses and households were already at historically low levels.
Financial markets changed little with Bank of England stocks, which were slightly larger than expected. The 10-year government bond yield fell slightly before climbing back to the day’s opening level of 0.205 percent.
The committee also left interest rates unchanged at 0.1 percent and did not consider voting to impose negative rates for the first time in the central bank’s 326-year history.
Noting that the outlook for the economy was “unusually uncertain” due to the second wave of Covid-19 and the Brexit negotiations still unresolved, the latest Bank of England forecasts contained a wide margin of error.
The committee based its forecast on the assumption that the coronavirus would gradually dissipate and on a relatively smooth transition to a free trade agreement between the UK and the EU.
In the first quarter of 2021, the Bank of England now expects that border delays for exports will limit the recovery by 1 percentage point of GDP, but the short-term effects will be temporary. In the long term, Bailey said that Brexit would “weigh on productivity and GDP during [three-year] forecast period ”.
With the licensing regime restored, the MPC expected unemployment to remain significantly lower than its September forecast, but predicted it would still rise from the current rate of 4.5 percent to 7.75 percent by next summer.
But the bank warned that the UK economy is likely to suffer permanent scars from the coronavirus crisis that “would be greater the longer current conditions of infection, restriction and uncertainty persist.”
The Bank of England revised down its growth forecasts for the next three years following the resurgence of Covid-19, and now estimates that activity in the economy will only regain pre-coronavirus levels in the first half of 2022.
In the long term, the MPC has drawn in pencil the lingering scars of the pandemic, resulting from forced changes in the shape of the UK economy, which will leave total output at 1.75 per cent of GDP below what that I thought possible at the beginning of the year. This scar estimate was higher than 1.5 percent in the August report.
Part of the way the MPC aims to encourage businesses to invest and households to spend is to commit to keeping interest rates at minimum levels until “there is clear evidence that significant progress is being made in phasing out capacity. surplus and the achievement of the 2% inflation target in a sustainable way ”.
With CPI inflation at 0.7 percent in September, it is expected to remain well below the Bank of England’s 2 percent target through 2021 and only meet the conditions set by the committee to raise rates late. 2023 at the earliest.
Additional reporting by Tommy Stubbington
