The Bank of England circulated an additional £100bn of cash into the economy in an attempt to alleviate the “unprecedented” impact of Covid-19 and has warned of a looming jobs crisis.
The Bank’s Governor Andrew Bailey said the economic hit between April and June may have been “less severe” than first feared due to an easing of lockdown, he warned against getting “carried away” by signs the recession may not be as deep as many experts are expecting.
The Bank said there are risks of “higher and more persistent” unemployment following the crisis and that the path of recovery is still not clear.
Mr Bailey said: “As partial lifting of restrictions takes place, we do see signs of some activity returning. We don’t want to get too carried away with it. We are still living in very unusual times.”
Members of the Bank’s Monetary Policy Committee (MPC) voted eight to one to expand its quantitative easing (QE) programme by £100bn to £745bn, following the extra £200bn announced in March.
According to inews.co.uk, the Bank also held interest rates at an all-time low of 0.1 per cent and confirmed there had been no discussion at the meeting of taking rates below zero, despite mounting speculation over such a move. But, Mr Bailey commented that negative rates are still being actively assessed and the Bank “won’t rule anything in or anything out”.
The extra QE which sees the Bank buy Government bonds from investors, pumping money into the economy in the process comes after official figures showed the economy contracted by a record 20.4 per cent in April.
The Bank said the fall in gross domestic product (GDP) between April and June may not be as bad as it set out in grim May forecasts, thanks partly to a recovery in consumer spending and the housing market.
It now believes the plunge in UK GDP over the first six months of 2020 may be around 20 per cent, rather than the 27 per cent it forecast in May’s report.
This led the Bank’s chief economist Andy Haldane to be the only MPC member to vote against the additional QE.
He said the recovery was happening “sooner and materially faster” than the Bank expected in May.
Minutes from the MPC meeting said: “Payments data are consistent with a recovery in consumer spending in May and June, and housing market activity has started to pick up recently.
“While recent demand and output data had not been quite as negative as expected, other indicators suggested greater risks around the potential for longer-lasting damage to the economy from the pandemic.”
Mr Bailey added recent worse-than-expected jobless data, and fears that many furloughed employees may lose their jobs, which raised worries over longer-term scarring in the economy.
Samuel Tombs at Pantheon Macroeconomics said: “We doubt this is the last QE extension. Unemployment looks set to rise sharply in the second half of this year and to fall back slowly thereafter.
“We look for a further QE extension of £50bn in November, but for the committee to hold back from cutting Bank rates below zero, due to the questionable benefits of such a step.”
Suren Thiru, head of economics of the British Chambers of Commerce (BCC), added:
“The central bank has rightly decided against moving interest rates into the negative, which risks doing more harm than good.
“The focus instead should be on delivering a fiscal environment that limits economic scarring and helps kickstart a recovery. This should include taking steps to close the remaining gaps in government support, including giving businesses with direct incentives to invest and hire, and stimulating consumer demand through a temporary, but significant cut in VAT.”