MercoPress. South Atlantic News Agency

Bank of England preparing new stimuli; economy could shrink 14% this year but bounce back 15% in 2021

Over 2020 as a whole, output was at risk of shrinking by 14% - an annual decline last seen in the early 1700s when Britain was beset by natural disaster and war

The Bank of England said Britain could be headed for its biggest economic slump in over 300 years due to the coronavirus lockdown and kept the door open on Thursday for further stimulus.

In what it called an ‘illustrative scenario’ rather than a standard forecast, the BoE said Britain’s economy was on course to shrink by 25% in the three months to June and for unemployment to jump to more than 9% of the workforce.

Over 2020 as a whole, output was at risk of shrinking by 14% - an annual decline last seen in the early 1700s when Britain was beset by natural disaster and war - despite what the BoE described as “very significant monetary and fiscal stimulus”.

The central bank’s scenario did, however, foresee the economy bouncing back sharply in 2021 with growth of 15% as lockdown restrictions were loosened.

The BoE kept its benchmark interest rate at an all-time low of 0.1% and left its target for bond-buying, most of it British government debt, at 645 billion pounds, as the stimulus measures taken in March continued to play out.

But in a sign more might be on the way, two of its nine policymakers - Michael Saunders and Jonathan Haskel - voted to increase the central bank’s bond-buying firepower by 100 billion pounds, and Governor Andrew Bailey said the BoE could act again.

“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,” Governor Andrew Bailey said.

“This is our total and unwavering commitment.” He said the BoE expected “the recovery of the economy to happen over time, though much more rapidly than the pull-back from the global financial crisis.”

The illustrative scenario was based on the government gradually lifting its coronavirus lockdown, that has shuttered swathes of the economy, between June and September.

Both decisions announced on Thursday were in line the forecasts of most economists in a Reuters poll. Many economists expect the BoE to increase its asset purchase program in June, before the extra 200 billion pounds it gave itself in March is exhausted by the furious pace of its buying of British government debt.

Some economists doubted Britain would bounce back as quickly as the BoE assumed, after recovery following the 2008-09 financial crisis took much longer than first expected.

“We see this forecast as credible for 2020, but are less convinced by the 2021 recovery, where we take a more cautious view, implying weaker growth, lower inflation, wider deficits and more MPC action,” Morgan Stanley’s Jacob Nell said.

The government has already rushed out spending and tax measures worth about 100 billion pounds to try to counter the effect of its coronavirus lockdown.

The BoE said inflation was likely to fall below 1% in the next few months, half the BoE’s target, but that recent figures suggested demand had stabilized, albeit at very low levels.

Minutes of this week’s discussions at the BoE showed policymakers thought there were risks that the illustrative scenario could prove too optimistic because people might remain cautious about resuming their normal lives after the lockdown.

Workers might be worried about their jobs and companies might also be more risk averse. The scenario did not cover the risk of a return of the coronavirus causing a second spike in infections and renewed lockdown.

“The financial system was, however, in a much better position to support households and businesses through this period compared with the global financial crisis,” the minutes said.

A separate BoE report on Thursday said an emergency test of the financial system’s resilience showed that top banks and building societies could keep lending - and also should do so to avoid an even deeper downturn.