The Bank of England increased its already huge bond-buying stimulus by a bigger-than-expected 150 billion pounds as it prepared for economic damage from new coronavirus lockdowns and the looming risk of Brexit. The move comes on the day that England entered a four-week lockdown to curb the second wave of COVID-19, which is now killing as many
Britons each day as it did in May.
The BoE said Britain's economy was set to shrink 2% during the fourth quarter as a result, and that the economy would shrink a record 11% over the course of 2020 overall, more than the 9.5% it had forecast in March.
"The outlook for the economy remains unusually uncertain," the BoE said.
"It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom."
The BoE kept its benchmark Bank Rate at 0.1%, as expected in the poll, and made little mention of negative rates while a consultation with banks over the practicalities is underway.
The BoE raised the size of its asset-purchase programme to 895 billion pounds, 50 billion pounds more than expected by most economists in a Reuters poll.
The central bank said that would give it enough firepower to stretch its buying of government bonds through to the end of 2021.
"An extraordinary economic shock warrants an extraordinary policy response," said Ambrose Crofton, global market strategist at J.P. Morgan Asset Management.
"The resurgence of the virus in recent months will mean both the government and companies are once again turning to global capital markets to borrow large sums. The Bank’s purchases in these markets will help prevent borrowing costs rising," he said.
Sterling rose against the dollar and the euro after the announcements. Bond yields fell.
SLOWER RECOVERY, HIGHER UNEMPLOYMENT
The central bank now expects Britain's economy to exceed its size before the COVID-19 pandemic only in the first quarter of 2022. Previously, the BoE had forecast the recovery would be complete by the end of next year.
Unemployment was set to peak 7.75% in the second quarter of next year, much higher than its most recent reading of 4.5%, the BoE said. Gross domestic product was likely to grow by 7.25% in 2021, weaker than a previous forecast of 9%.
But its two-year inflation forecast remained unchanged at 2%, the central bank's target.
"Our view is that inflation will be closer to 1.5% by the end of 2022. That’s why we believe the Bank will still have to increase its policy support," Ruth Gregory, an economist at Capital Economics, said.
Britain's economy has been supported by a surge in debt-fuelled spending by the government. The BoE is buying up many of those bonds. Finance minister Rishi Sunak is due to speak in parliament later on Thursday about his huge support for the economy.
Despite the spending, Britain faces the worst peak-to-trough contraction of any Group of 20 economy, Moody's said on Oct. 16 when it cut Britain's credit rating. Britain also faces the risk of a trade shock when its post-Brexit transition with the European Union expires on Dec. 31. So far, London and Brussels have failed to strike a new agreement. The BoE's Monetary Policy Committee said trade would suffer even if there is a deal.
"There is uncertainty around the extent to which the initial adjustment to new trading arrangements with the EU will affect activity," the BoE said.
"The MPC’s projections are also conditioned on the assumption that cross-border trade falls temporarily in the first half of 2021 as businesses adjust to the new trading arrangements with the EU."
GDP is likely to suffer a 1% hit from the changes in the first quarter of next year, limiting recovery from the fourth-quarter lockdown. (This story corrects final paragraph to show 1% hit is from end of post-Brexit transition period, not Q1 GDP growth rate)