Bank of England ramps up stimulus again to tackle COVID and Brexit hit

LONDON: The Bank of England increased its already huge bond-buying stimulus by a bigger-than-expected 150 billion pounds ($195 billion) 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 a 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 per cent during the fourth quarter as a result, and that the economy would shrink a record 11 per cent over the course of 2020 overall, more than the 9.5 per cent 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 per cent, 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.
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 per cent in the second quarter of next year, much higher than its most recent reading of 4.5 per cent, the BoE said. Gross domestic product was likely to grow by 7.25 per cent in 2021, weaker than a previous forecast of 9 per cent.
But its two-year inflation forecast remained unchanged at 2 per cent, the central bank’s target. “Our view is that inflation will be closer to 1.5 per cent 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.
— Reuters