The Bank of England has launched another 100 billion pounds ($A181.6 billion) of economy-boosting action in the face of the coronavirus crisis, despite signs the hit may be “less severe” than first feared.
Members of the Bank’s Monetary Policy Committee (MPC) voted eight to one to expand its quantitative easing (QE) program to 745 billion pounds, on top of an extra 200 billion pounds announced in March.
The Bank held interest rates at an all-time low of 0.1 per cent, despite mounting speculation that policymakers may look to take rates below zero for the first time ever to pull the economy out of its nosedive.
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.
But the Bank said the fall in gross domestic product (GDP) between April and June may be not as bad as it set out in gloomy May forecasts, thanks partly to a recovery in consumer spending and the housing market.
It now believes the second quarter plunge in UK GDP may be around 20 per cent compared with the final three months of 2019, rather than the 27 per cent it forecast in May’s report.
This led one of the MPC members – the Bank’s chief economist Andy Haldane – to hold off from voting for more QE.
In minutes of the MPC meeting, the Bank said: “The emerging evidence suggested that the fall in global and UK GDP in the second quarter would be less severe than set out in the May report.”
It said the “recovery in demand and output was occurring sooner and materially faster than had been expected at the time of the previous MPC meeting”.
It added: “If this persisted, cumulative output losses over the policy horizon could plausibly have halved compared with what had been expected at the time of the May report.”
Following the six per cent fall in GDP in March and 20.4 per cent plunge in April, the UK economy has begun bouncing back in May and June as lockdown restrictions have eased, according to the Bank.
But it warned there were risks of “higher and more persistent” unemployment following the crisis and that the path of recovery was still unclear.
It said it “stands ready to take further action as necessary to support the economy”.
In the minutes, the Bank also revealed that banks had been slower than expected to cut mortgage rates in response to base rate cuts since March.
The pound was down 0.5 per cent at 1.25 US dollars and 0.4 per cent lower at 1.11 euros after the rates decision.
Economists said the pace of QE expansion was likely to slow sharply, with the Bank stating it would complete the latest APS100 billion only by the “turn of the year”.
But 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 APS50 billion in November, but for the committee to hold back from cutting Bank rate below zero, due to the questionable benefits of such a step.”