UK’s recession ‘less bad’ than feared, Bank of England
LONDON (AP) — The Bank of England unveiled another big stimulus package for the U.K. economy as it tries to limit the scale of the coronavirus recession, which it now believes will be “less severe” than it feared last month.
In a statement Thursday, the bank’s policy making panel said it was increasing its government bond-buying program by a further 100 billion pounds ($125 billion) despite signs of a recent economic improvement as lockdown restrictions are eased. The increase was at the lower end of expectations and half the stimulus announced in March.
The bank had warned in May that the U.K. economy could end the first half of the year around 27% smaller than where it started.
Ben Broadbent, a deputy governor at the bank, said Thursday that the first-half contraction would more likely be in the 20% range as people begin spending again and the housing market picks up.
While restrictions are easing, notably t he reopening in England of shops selling nonessential items such as books, sneakers and toys, the economy is careening toward one of its deepest recessions ever. New figures show the U.K. economy shrank by 20.4% in April alone, the first full month of lockdown.
There are two motivations behind the fresh round of purchases of government bonds from investors, such as pension funds — to keep a lid on interest rates for such things as home mortgages and loans, and to keep money flowing in a time of acute stress.
The bank’s monetary policy committee opted against sending its main interest rate into negative territory Thursday, leaving it at 0.1%, the lowest in the bank’s 326-year history.
Governor Andrew Bailey said the merits of negative interest rates — whereby financial institutions are basically encouraged to lend by penalizing them for parking cash at the central bank — are being assessed. He said there was no discussion about them at the meeting.
“We haven’t ruled anything in and we haven’t ruled anything out,” he said.
Bailey warned unemployment is likely to rise sharply in coming months as government-funded support programs come to an end. While not speculating about how many jobs may be lost, he said unemployment levels will likely have the “steepest trajectory” ever seen.
Unemployment in the U.K. has not spiked anywhere as high as levels seen elsewhere, notably in the United States, largely because of the government’s Coronavirus Job Retention Scheme, which has basically insulated the jobs market. The U.K. has been paying up to 80% of the salaries of workers retained, up to 2,500 pounds ($3,125) a month.
Many companies have not cut jobs, with 1.1 million employers so far taking advantage of the scheme to furlough 9.1 million people at a cost to the government of 20.8 billion pounds. With the scheme set to end this autumn, there are worries that firms will start cutting jobs at an accelerating rate through the summer, sending the jobless rate spiking from around 4% currently, to well above 10%.
In addition to the bank’s stimulus, the British government is readying a fiscal package for this summer, potentially involving a sales tax cut and funding big transport and green projects.
“Along with the weight of monetary policy, implementing a recovery plan which creates jobs and re-skilling opportunities which support sustainable growth in the long-term will be essential,” said Alpesh Paleja, lead economist at the Confederation of British Industry.
Britain has the highest coronavirus death toll in Europe, at over 42,000, and the Conservative government has been sharply criticized for what many see as its slow, muddled response to fighting the pandemic.
Britain also faces economic risks from its historic decision to leave the European Union, which it did in January. It is in a transition period now with the 27-nation bloc until the end of the year, when it could face trade challenges if no deal about the future relationship is agreed in time.