The Bank fo England announced its rate decision early on Thursday and kept rates on hold but warned the UK economy could contract 14% in 2020.

The contraction in the economy would be the result of a 25% slump in activity through the spring due to the COVID-19 lockdown.

Despite the dire warnings for economic activity during the coronavirus lockdown, the Bank of England said it saw economic activity bouncing back sharply in 2021.

Sterling rose on the news with GBP/USD touching 1.2418 before falling back.

“The headline takeaways are all rather terrifying: a 14% contraction in the UK in 2020 (and a 25% slump in Q2), with unemployment of 9% fast approaching. Globally the central bank is expecting to shrink by 20% in the second quarter.,” said Connor Campbell, analyst at Spreadex.

“Crucially, it did also state that it expects an aggressive rebound in 2021, with growth of as much as 15% in the UK.”

Interest rates

The Monetary Policy Committee voted unanimously to keep interest rates at hold at 0.1%. The Bank of England made a series of rate cuts, including an emergency cut to interest rates, at the start of the spread coronavirus to help stabilise the financial system as the economy shutdown.

Despite not acting to change policy today, the Bank of England Governor said they would act again if needed.

“However the economic outlook evolves, the Bank will act as necessary to deliver the monetary and financial stability that are essential for long-term prosperity and meet the needs of the people of this country,” said Andrew Bailey, Governor of the Bank of England.

The Bank of England said it saw CPI inflation falling beneath 1% in the coming months due to a drop in energy prices. Oil prices have been rocked by a demand shock and price war between Russia and Saudi Arabia.

As well as taking action themselves, The Bank of England instructed UK banks the cease payouts, including dividends, to increase liquidity through the crisis.