The Monetary Policy Committee left its policy unchanged on Thursday, with interest rates suspended at 0.1%, and its target for the total stock of asset purchases is also stable at £ 745 billion.
The committee said the initial impact of the coronavirus lockdown measures was less severe than expected in May, although it still expected production to be more than 20% lower in the second quarter. of 2020 compared to the last quarter of 2019.
A strong recovery in some areas of consumer spending is expected to trigger a rapid rebound over the next few months, with GDP falling 9.5% year-round, compared to 14% expected by the central bank in May.
However, the BoE estimates that the recovery will slow significantly after the third quarter of 2020, reflecting continuing consumer concerns about health risks and fears about job security. Its central forecast shows that GDP is more than 5% below its pre-pandemic peak at the end of 2020, and will not return to its pre-crisis level until the end of 2021.
The MPC stressed that there were big downside risks to this forecast and said it would not tighten monetary policy without clear evidence “that significant progress is being made to eliminate slack and sustainably achieve the 2 percent inflation target ”.
Andrew Bailey, the BoE governor, said that meant there would be no movement to withdraw stimulus measures until the MPC was sure unemployment was going down and inflation was going to exceed the target. The BoE remained “ready to act” with further stimulus measures if the economic outlook deteriorated, he added.
Bailey said the BoE is not considering any move to cut interest rates into negative territory in the short term. Negative rates “are part of our toolbox. . . but at the moment we do not plan to use them, ”he told reporters.
The bank’s central forecast shows that consumer price inflation is even further below the short-term target, averaging around 0.25% in the latter part of the year, and falling moving closer to the objective of 2% of the MPC in two years.
The BoE has assumed there will be lingering concerns about the risk of infection and some restrictions on economic activity over the next few months, although it does not see the likelihood of a second national lockdown.
However, many economists said the bank’s forecast for a quick rebound still looked overly optimistic.
“The V-shaped recovery that the BoE continues to project seems unlikely, to put it mildly,” said Kallum Pickering, economist at Berenberg, the investment bank. He added: “In our opinion, economic developments will most likely be lower than this near-perfect scenario as well. . . policymakers may need to do more to support the recovery. ”
The BoE has become more optimistic than it was in May about the outlook for the labor market, forecasting that unemployment will peak at 7.5 percent by the end of the year – well below what most economists predict.
However, he also warned that unemployment could take much longer than previously thought to return to pre-pandemic lows. Indeed, the recession has hit labor-intensive sectors – such as retail and hospitality – much harder than others, and if they are suffering durably, those who have lost their jobs. work may not have the necessary skills to fill the available positions.
The BoE has also warned of more lasting damage to the economy, with its forecast showing GDP 1.5% below its pre-pandemic trajectory at the end of 2023. This long-term scarring is due to the fact that Business investment and start-up activities are expected to remain weak, weighing on productivity.
The bank’s financial policy committee said companies continued to face a severe cash flow shock, with many likely needing additional funding to survive the disruption. He predicted that if the economy followed the path indicated in the BoE’s central projections, companies could face a cash deficit of up to £ 200 billion in this fiscal year.
But the FPC said that even with an increase in corporate bankruptcies, the capital buffers of UK banks were more than enough to absorb the losses – even though the loss of output and the unemployment rate were double that of the central projection of the MPC.
He also made clear that he wanted banks to continue lending to cash-strapped businesses, saying it would be “costly for them and the economy as a whole to take defensive measures,” and that he was in their collective interest to continue supporting households and businesses.
The British pound rose 0.4% against the US dollar to $ 1.3160 after the decision, its highest level since the March crisis as concerns over coronaviruses spread across markets.