The Bank of England has announced a new £100bn stimulus package for the UK economy amid fears of a surge in unemployment in Britain’s hotels, restaurants and shops following the end of the government’s furlough scheme in the autumn.

Threadneedle Street’s nine-member monetary policy committee (MPC) voted eight to one to boost the amount of money being pumped into the economy despite evidence that easing the lockdown had prompted a more rapid pickup in spending than the Bank envisaged.

The MPC said some of the increase in activity after the Covid-19 shutdown was taking place in the current quarter, rather than in the July to September period. It now expected the economy to contract by 20% in the first half of the year rather than 27%.

Andrew Bailey, the Bank’s governor, said: “As partial lifting of the measures takes place, we see signs of some activity returning. We don’t want to get too carried away by this. Let’s be clear, we’re still living in very unusual times.”

Although the hit to output had been less severe than expected, the MPC said it was hard to draw conclusions about the UK’s recovery prospects and said extra stimulus was needed to support the economy and push inflation – currently at 0.5% – back to its 2% target.

Ben Broadbent, one of the Bank’s deputy governors, said the MPC had put more weight on the risk that unemployment would go up as the government’s furlough is phased out than on the evidence of stronger activity.

The committee is worried that job losses could be concentrated in sectors such as retailing and hospitality, where falls in sales have been greatest and furloughing most marked.

The Bank will seek to underpin the nascent recovery through its quantitative easing (QE) bond-buying programme, which it has already expanded by £200bn since the pandemic hit the UK earlier in the year.

QE graphic

Bailey said the pace at which bonds would be purchased would slow over the current months but this was due to financial markets being much calmer than three months ago.

“We are slowing from warp speed to something that by historical standards still looks fast,” the governor added.

The £100bn of additional QE, to a total of £745bn, was the bare minimum that the City had been expecting from the MPC, with some analysts predicting a £200bn boost.

Bailey also quashed speculation that the Bank was close to announcing negative interest rates for the first time in its 326-year history.

The MPC cut the official cost of borrowing to a record low of 0.1%, but the governor said they would be going no lower for the time being. “We are assessing the case for negative interest rates,” Bailey said. “It is not a decision that is any sense imminent.”

The MPC said the outlook for the economy was still “unusually uncertain” and it was too early to say whether activity would continue to pick up more quickly than it had anticipated in May.

“Although stronger than expected, it is difficult to make a clear inference from that about the recovery thereafter. There is a risk of higher and more persistent unemployment in the UK. Even with the relaxation of some Covid-related restrictions on economic activity, a degree of precautionary behaviour by households and businesses is likely to persist.

“The economy, and especially the labour market, will therefore take some time to recover towards its previous path. Inflation is well below the 2% target and is expected to fall further below it in coming quarters, largely reflecting the weakness of demand.”

Andy Haldane, the Bank’s chief economist, was the one dissenting voice on the committee, voting against an expansion of QE because “the recovery in demand and output was occurring sooner and materially faster than had been expected at the time of the previous MPC meeting”.

If the recent trend continued, Haldane said, the cumulative loss of output as a result of the pandemic would be only half that envisaged by the Bank in May, boosting the chances a pick-up in inflation.

Contributor

Larry Elliott Economics editor

The GuardianTramp

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