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Bank governor sees ‘unprecedented’ hit to economy as £150bn of new QE unleashed

Written by on 5 November 2020

The governor of the Bank of England (BoE) has told Sky News the economy is facing a “historically unprecedented” hit this year, hours after it ramped up virus crisis support by GBP150bn.

Andrew Bailey spoke about twin threats to growth from renewed coronavirus lockdowns and Brexit disruption after the latest meeting of the Bank’s Monetary Policy Committee (MPC) that saw it unleash more quantitative easing (QE).

Interest rates were held at their record low of 0.1% – defying speculation among some commentators that it could opt for negative rates for the first time in its history to encourage more lending by banks and spending.

Track the COVID-19 hit to the UK economy

The Bank signalled that its work examining the effects on negative rates had not yet been completed.

As England entered its second lockdown of the year, it said additional QE now would help oil the wheels as large parts of the economy grind to another coronavirus-enforced halt – resulting in an expected 2% additional hit to growth by the year’s end.

Mr Bailey said of the damage: “Now we think there’ll be a further downturn in the fourth quarter…so I think it’s quite likely that the economy will end this year probably around 10 or 11% below where it was in terms of activity in the last year and that is historically unprecedented.”

The fresh QE also reflected, what the Bank called, an “initial period of adjustment” to be expected following the conclusion of the Brexit transition period, saying its influence was based on the assumption of a trade deal being agreed by the year’s end.

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It saw a 1% hit to first quarter growth next year, as a result.

The Bank dug deeper hours before the chancellor was due to update MPs on the support available to businesses and their staff from the government, including an expansion of the furlough scheme.

The size of the BoE’s QE, or asset purchase programme, now stands at GBP875bn – GBP450bn of that being introduced since March.

It allows the bank to release cash into the economy to support normal, everyday activities for businesses and consumers by keeping borrowing costs low.

The Bank, in its update on Wednesday, said the economy would now remain below its pre-pandemic peak through the first quarter of 2022.

It had previously expected the recovery to have been completed next year.

Andrew Bailey thinks the economy could recover quite quickly
Image:
Andrew Bailey took over as governor just before the lockdown of the economy began in March

However, it stopped short of forecasting a so-called double-dip recession as it expected that output, following a lockdown hit in the current quarter, would be positive to the tune of 2.4% during the first three months of 2021 despite the expected Brexit complications,

The Bank also upwardly revised its projections for the virus crisis hit to employment.

Hospitality and aviation suffer worst jobs hit

Hospitality and aviation suffer worst jobs hit

It said the marginal increase to a jobless rate peak of 7.75% this year from 7.5% reflected the government’s decision to extend the furlough scheme.

Minutes of the MPC’s meeting read: “GDP is projected to recover further as the direct impact of Covid on the economy is assumed to wane.

“Activity is also supported by the substantial fiscal policies already announced and accommodative monetary policy.

“The recovery takes time, however, and the risks around the GDP projection are judged to be skewed to the downside.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the bank’s QE action implied it could spin the wheel again early next year.

He explained: “The MPC’s decision to increase its holdings of gilts by GBP150bn over the course of 2021 implies that weekly purchases will be 25% lower on average next year than at present, though the committee has pledged to maintain the current pace of its purchases initially.”

Bank digs deeper than expected for cold winter ahead – by Paul Kelso, business correspondent

The first day of the second lockdown for England brought a cold blast of economic reality from the Bank of England.

That interest rates remained unchanged at the historic low of 0.1%, set in the teeth of the first wave of Covid in March, was not a surprise.

Less well anticipated was that the level of further support the Bank injected into the economy. Economists and financial markets had anticipated another GBP100bn of QE.

In fact the MPC dug deeper, authorising GBP150bn of bond purchases, taking the total this year to GBP450bn, an extraordinary intervention underlining the economic havoc wreaked by coronavirus.

The decision has been taken on the assumption that the economy will contract further and for longer than previously assumed as a result of the second wave.

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‘Now is not the time to balance the books’

The Bank forecasts GDP will contract by 2% in the final quarter of the year, a reversal on the previous forecast of 4% of growth, and coming in a year that has already seen the economy shrink by 9%.

The forecast dashes any prospect of a V-shaped recovery and the economy now faces a double-dip contraction, though not yet a second recessionary period (defined as two consecutive quarters of decline).

GDP is now not forecast to recover to pre-Covid levels until the middle of 2022.

Unemployment is also expected to rise more than previously thought, reaching 7.75% by the middle of next year.

Brexit is also likely to deliver a sting in the tail of the year.

The Bank forecasts that even if the government reaches a deal with the European Union trade in both goods and services will be lower for the first six months of the year, not least because many companies are still not prepared for 1 January.