The bank’s Monetary Policy Committee (MPC) voted by an 8-1 majority to increase the target stock of UK government bonds – a continuation of the previous £200 billion of bonds purchased back in March – in light of the news that UK inflation dipped to a new four-year low in a report published by the Office for National Statistics (ONS) on Wednesday. The current bank interest rate still stands at 0.1%.
Last Friday, Bank of England governor Andrew Bailey stated he was “ready to take action” to help the UK economy withstand the coronavirus crisis after ONS figures revealed that the economy had nosedived by a record 20.4% in April.
Widespread lockdown measures and a free-fall in consumer demand was cited as the cause for the biggest monthly contraction on record. A total of 612,000 employees were dropped from UK payrolls between March and May, although analysts have pointed out that the numbers likely would have worse without the government’s coronavirus Job Retention Scheme allowing businesses to furlough staff.
The bank’s £100 billion stimulus package follows warnings from last month that the UK economy may shrink by as much as 30% in the first half of 2020 – the worst performance since the early 1700s. However, in a statement published on the Bank of England’s official website, the bank reported on growing evidence that previous forecasts may have been on the pessimistic side:
“There are signs of consumer spending and services output picking up, following the easing of Covid-related restrictions on economic activity. Recent additional announcements of easier monetary and fiscal policy will help to support the recovery. Downside risks to the global outlook remain, however, including from the spread of Covid-19 within emerging market economies and from a return to a higher rate of infection in advanced economies”.
The outlook for 2020 remains nonetheless uncertain, with policymakers emphasising the weakness of the job market and “higher and more persistent unemployment” for the foreseeable future. The government’s furlough scheme is scheduled to come to an end in October, with a number of Labour MPs calling for Chancellor Rishi Sunak to deliver an emergency budget to help counter the expected surge in job losses and unemployment claims.
Commenting on the projections for the rest of the year, Mr Bailey stated:
“Even with the relaxation of some Covid-related restrictions on economic activity, a degree of precautionary behaviour by households and businesses is likely to persist. The economy, and especially the labour market, will therefore take some time to recover towards its previous path”.
The move has failed to impress, however, with the FTSE 100 sinking despite the Bank of England’s efforts – down 0.91% at 6,196 shortly after lunch time on Thursday.