The UK’s central bank has rowed back on its predictions of a swift recovery from the coronavirus crisis, warning the economy would not exceed pre-Covid levels until the end of 2021.
In an update published today, the Bank of England forecast that gross domestic product would not exceed its Q4 2019 level until the end of next year — a slight retreat from the Bank’s initial predictions of a “fast” but “temporary” V-shaped blip in GDP.
But the BoE also said the damage to GDP in the first half of the year was “materially less sharp” than predicted in May and that the downturn was less severe than first feared.
It estimates the UK’s GDP fell by around 12 per cent in the six months to June which, while “very substantial”, was not as bad as initially expected. The BoE said this reflected “restrictions being eased sooner than assumed” and a “more rapid recovery in consumer spending”.
The BoE said: “The outlook for the UK and global economies remains unusually uncertain.
“It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors.”
Today’s announcement also showed the monetary policy committee had judged its existing monetary policy — interest rate at 0.1 per cent and a target of £745bn for asset purchases — remained suitable.
The BoE did not rule out negative interest rates in the future, saying the committee was “currently considering” whether the effective lower bound for bank rate could be below zero and whether a negative policy rate could provide economic stimulus.
Inflation is projected to remain well below the BoE’s 2 per cent target in the near-term, reflecting the direct and indirect effects of Covid-19 such as lower energy prices and cuts to VAT.
The BoE thought inflation would hit its 2 per cent target in two years’ time.
Unemployment was expected to “rise materially” to about 7.5 per cent by the end of the year as the government’s furlough scheme closes and was unlikely to start declining again until the beginning of 2021, according to the Bank.