The Bank of England voted to purchase another £150bn of government bonds on Thursday in a bid to boost spending in the economy as England enters a second coronavirus lockdown.
After a unanimous vote at the central bank’s Monetary Policy Committee, the BoE will raise the total amount of quantitative easing from £745bn to £895bn over the course of 2021.
Andrew Bailey, the central bank’s governor, said the policy stimulus was decided after the “dramatic impact” of the resurgence of coronavirus and the restrictions to bear down on infections across the UK. There was value in acting “quickly and strongly”, he added.
The MPC said the action taken was in response to “signs that consumer spending has softened across a range of high-frequency indicators, while investment intentions have remained weak”.
It forecast a double-dip recession for the UK following the resurgence of coronavirus, with gross domestic product dipping 2 per cent in the fourth quarter of the year before recovering early in 2021 if the prevalence of coronavirus has declined.
The monetary policymakers said they expected the economy to slow significantly in response to the second wave of Covid-19 and restrictions, but pick up again in the first quarter of next year.
There was no statement on how the MPC members expected the additional money would boost spending when borrowing costs for government, businesses and households were already at historically low levels.
Financial markets were little changed on the BoE’s actions, which were slightly larger than expectations. The 10-year gilt yield dipped slightly before rising back again to the day’s opening level of 0.205 per cent.
The committee also left interest rates unchanged at 0.1 per cent 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 still unresolved Brexit negotiations, the BoE’s latest forecasts contained a wide margin of error.
The committee based its forecast on the assumption that the coronavirus would dissipate gradually, and on a relatively smooth transition to a free trade agreement between the UK and the EU.
In the first quarter of 2021, the BoE now expects that hold-ups at the border for exports will limit the recovery by 1 percentage point of GDP, but the short-term effects will be temporary. In the longer term, Mr Bailey said that Brexit would “weigh on productivity and GDP over the [three-year] forecast period”.
With the furlough scheme having been reinstated, 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 per cent to 7.75 per cent by next summer.
But the bank warned that the UK economy was likely to suffer permanent scars from the coronavirus crisis that “would be greater the longer that the current conditions of infection, restriction and uncertainty persisted”.
The BoE revised down its growth forecasts over the next three years following the resurgence of Covid-19, and it now estimates that activity in the economy will only regain pre-coronavirus levels in the first half of 2022.
Over the long term the MPC has pencilled-in persistent scars from the pandemic, resulting from forced changes to the shape of the UK economy, which will leave total output 1.75 per cent of GDP lower than it thought possible at the start of the year. This estimate of scarring was up from 1.5 per cent in the August report.
Part of the way the MPC intends to encourage businesses to invest and households to spend is to commit to keeping interest rates at rock-bottom until “there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably”.
With CPI inflation at 0.7 per cent in September, it is expected to remain well below the BoE’s 2 per cent target through 2021 and only meet the conditions set by the committee for raising rates late in 2023 at the earliest.
Additional reporting by Tommy Stubbington