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.


Larry Elliott Economics editor

The GuardianTramp

Related Content

Article image
For the Covid economic recovery look to the Treasury, not the Bank
Fears about high government borrowing raising inflation and interest rates are overstated

Larry Elliott

01, Nov, 2020 @10:45 AM

Article image
Make jobs higher priority, Gordon Brown tells Bank of England
Former prime minister calls for Bank to take employment into account when setting policies

Larry Elliott

09, Sep, 2020 @11:01 PM

Article image
UK unemployment to double and economy to shrink by 14%, warns Bank of England
Bank outlines scale of Covid-19 shock in 2020 with forecast for deepest recession in 300 years

Richard Partington Economics correspondent

07, May, 2020 @12:35 PM

Article image
Bank of England warns Brexit vote will damage living standards
Bank of England hints interest rates may increase sooner than markets think but warns of near-term squeeze on consumers

Katie Allen

11, May, 2017 @3:20 PM

Article image
Bank of England ‘addicted’ to creating money, say peers
BoE must be more transparent and justify use of quantitative easing, says Lords report

Larry Elliott Economics editor

15, Jul, 2021 @11:01 PM

Article image
UK on course for a V-shaped recovery, says Bank of England
Economic activity has picked up but unemployment could prove a major concern, says Bank’s chief economist

Kalyeena Makortoff and Richard Partington

30, Jun, 2020 @2:41 PM

Article image
UK set for strongest economic growth since WWII, forecasts Bank of England
Interest rates to be kept at record low of 0.1% with GDP growth now forecast to rise at 7.25% in 2021

Richard Partington Economics correspondent

06, May, 2021 @2:34 PM

Article image
Bank of England launches new £150bn stimulus package
Move to prop up stricken economy comes amid second Covid wave and fresh restrictions

Richard Partington Economics correspondent

05, Nov, 2020 @4:17 PM

Article image
Bank of England sharply raises UK growth forecast
Central bank predicts economy will grow by 2% this year as consumers and businesses appear to shrug off Brexit blues

Katie Allen

02, Feb, 2017 @12:46 PM

Article image
UK economy shows signs of faltering before second Covid-19 wave
Guardian analysis shows mounting fears of double-dip recession as activity weakens

Richard Partington Economics correspondent

29, Sep, 2020 @1:00 PM