Bank of England unveils another big stimulus for UK economy - InfoNews

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Bank of England unveils another big stimulus for UK economy

Union flags and support messages are seen in the shopping street, Oxford Street, ahead of the reopening of the non-essential businesses on Monday, June 15, as some of the coronavirus lockdown measures are eased, in London, Friday, June 12, 2020. The British economy shrank by a colossal 20.4% in April, the first full month that the country was in its coronavirus lockdown, official figures showed Friday. (AP Photo/Alberto Pezzali)
June 18, 2020 - 6:39 AM

LONDON - The Bank of England unveiled another big stimulus for the U.K. economy as it tries to limit the scale of the coronavirus recession, which it now thinks will be less severe than it thought it would be 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 that the second-quarter fall in economic output will be less severe than it had thought last month.

The bank had warned then that the U.K. economy could shrink by around 25% in the second quarter alone and end the first half of 2020 around 27% smaller than where it ended 2019.

Ben Broadbent, the bank's deputy governor for monetary policy, said Thursday that the first-half contraction would more likely be in the 20% range following signs of an improving consumer backdrop and a pick-up in the housing market.

Although some of the country’s lockdown restrictions are easing, notably t he reopening of shops selling nonessential items such as books, sneakers and toys, the U.K. careening toward one of its deepest recessions ever.

The meeting comes after figures showing that the U.K. economy shrank by 20.4% in April alone, the first full month that the country was in lockdown. In March, as the coronavirus restrictions rolled out, it had contracted a further 5.8%.

There are two motivations behind the bank's 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 through the financial system in a time of acute stress.

The bank's monetary policy committee opted against cutting its main interest rate, even into negative territory — its main interest rate was left at 0.1%, the lowest in the bank's 326-year history.

Andrew Bailey, the bank's new governor, said the merits of negative interest rates — whereby financial institutions basically pay for the right to park their 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.

Though noting some modest improvements since April, the committee warned that unemployment is likely to rise sharply in the coming months as government-funded support programs come to an end.

Bailey wouldn't speculate on how many jobs may be lost, but did say that the rise in unemployment would likely be 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 ($26 billion). 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 over 10%.

The committee also said that the unprecedented situation means that the outlook for the U.K. and global economies is “unusually uncertain” and will depend “critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors.”

In addition to the bank's support measures, the British government is also readying a big fiscal package for this summer to help the economy, potentially involving a sales tax cut and funding big transport and green projects.

Britain has the worst 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.

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Follow AP coverage of the virus outbreak at https://apnews.com/VirusOutbreak and https://apnews.com/UnderstandingtheOutbreak

News from © The Associated Press, 2020
The Associated Press

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