BoE ramps up stimulus again to tackle COVID and Brexit hit

The Bank of England increased its already huge bond-buying stimulus by a bigger-than-expected 150 billion pounds ($195 billion) as it prepared for economic damage from new coronavirus lockdown and the looming Brexit risks.

The move comes on the day that England entered a four-week lockdown to curb a second wave of COVID-19, which is now killing as many Britons each day as it did in May.

The BoE said Britain’s economy was set to shrink 2% during the fourth quarter as a result, and that the economy would shrink a record 11% over the course of 2020 overall, more than the 9.5% it had forecast in March.

“The outlook for the economy remains unusually uncertain,” the BoE said. “It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom.”

The BoE kept its benchmark Bank Rate at 0.1%, as expected in the poll, and made little mention of negative rates while a consultation with banks over the practicalities is underway.

The BoE raised the size of its asset-purchase programme to 895 billion pounds, 50 billion pounds more than expected by most economists in a Reuters poll.

The central bank said that would give it enough firepower to stretch its buying of government bonds through to the end of 2021.

“An extraordinary economic shock warrants an extraordinary policy response,” said Ambrose Crofton, global market strategist at J.P. Morgan Asset Management.

“The resurgence of the virus in recent months will mean both the government and companies are once again turning to global capital markets to borrow large sums. The Bank’s purchases in these markets will help prevent borrowing costs rising,” he said.

Sterling rose against the dollar and the euro after the announcements. Bond yields fell.

The central bank now expects Britain’s economy to exceed its size before the COVID-19 pandemic only in the first quarter of 2022. Previously, the BoE had forecast the recovery would be complete by the end of next year.

Unemployment was set to peak 7.75% in the second quarter of next year, much higher than its most recent reading of 4.5%, the BoE said.

Gross domestic product was likely to grow by 7.25% in 2021, weaker than a previous forecast of 9%.

But its two-year inflation forecast remained unchanged at 2%, the central bank’s target.

“Our view is that inflation will be closer to 1.5% by the end of 2022. That’s why we believe the Bank will still have to increase its policy support,” Ruth Gregory, an economist at Capital Economics, said.

Britain’s economy has been supported by a surge in debt-fuelled spending by the government. The BoE is buying up many of those bonds.

Finance minister Rishi Sunak is due to speak in parliament later on Thursday about his huge support for the economy.

Despite the spending, Britain faces the worst peak-to-trough contraction of any Group of 20 economy, Moody’s said on 16 October when it cut Britain’s credit rating. Britain also faces the risk of a trade shock when its post-Brexit transition with the European Union expires on 31 December. So far, London and Brussels have failed to strike a new agreement. The BoE’s Monetary Policy Committee said trade would suffer even if there is a deal.

“There is uncertainty around the extent to which the initial adjustment to new trading arrangements with the EU will affect activity,” the BoE said. “The MPC’s projections are also conditioned on the assumption that cross-border trade falls temporarily in the first half of 2021 as businesses adjust to the new trading arrangements with the EU.”

GDP is likely to suffer a 1% hit from the changes in the first quarter of next year, limiting recovery from the fourth-quarter lockdown.

Similar articles

  • UK starts replacing EU regulations

    UK starts replacing EU regulations

    Britain is to begin replacing or scrapping EU regulations that were copied into British law before EU divorcet, Brexit minister David Frost said. To avoid uncertainty and confusion as Britain left the EU after 40 years, the government automatically carried thousands of EU laws and regulations into British law so that they would still apply after Brexit.

    65
  • UK’s PM Johnson replaces foreign secretary in Cabinet shake-up

    UK’s PM Johnson replaces foreign secretary in Cabinet shake-up

    British Prime Minister Boris Johnson demoted his top diplomat and fired his education minister in a major government shakeup Wednesday, as he tried to move on from a series of political missteps and revive his promise to “level up” prosperity across the UK, AP reported. In the biggest move, Johnson demoted Foreign Secretary Dominic Raab, who has faced criticism for delaying his return from a holiday in Greece as the Taliban took over Afghanistan last month.

    66
  • UK recommends Covid-19 booster shots for over 50s

    UK recommends Covid-19 booster shots for over 50s

    The UK will offer a third dose of Covid-19 vaccine to everyone over age 50 and other vulnerable people after an expert panel said the boosters were needed to protect against waning immunity this winter, AP reported. Health Secretary Sajid Javid told lawmakers on Tuesday that the government had accepted the recommendation of the Joint Committee on Vaccination and Immunization and would start offering booster shots next week. The World Health Organization has asked wealthy nations to delay booster shots until every country has vaccinated at least 40% of their populations.

    65