Central Banks

Bank of England projects worst UK economic slump since 1706

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Key Points
  • In its "illustrative scenario" for the economic outlook, the Bank said it expects U.K. gross domestic product to fall by 14% over 2020 as a whole, driven by a 25% decline in the second quarter.
  • Given the assumed relaxation of social distancing measures, however, the BOE expects the fall in GDP to be temporary and followed by a rapid recovery.
  • Since the beginning of the pandemic, the BOE has cut rates twice from 0.75% to 0.1% and announced £200 billion ($247.55 billion) of new quantitative easing, bringing its bond buying program to a total of £645 billion.
A woman wearing a protective face mask crosses the road in front of the Bank of England in what would normally be the morning rush hour in the City of London on March 17th, 2020. The financial district of the UK is unusually quiet after the government requested people to refrain from all but essential travel and activities yesterday.
Jonathan Perugia

The Bank of England (BOE) on Thursday held interest rates at 0.1% but said it stands ready to take further action should the economic crisis caused by the coronavirus pandemic continue to deteriorate.

The bank's Monetary Policy Committee (MPC) voted unanimously in favor of keeping rates unchanged for now. With a majority of 7-2, the committee also voted to continue with its planned £200 billion ($247.55 billion) quantitative easing program, bringing its bond-buying program to a total of £645 billion. Two members of the committee favored an additional £100 billion of stimulus.

In its "illustrative scenario" for the economic outlook, the bank said it expects U.K. gross domestic product (GDP) to fall by 14% over 2020 as a whole, driven by a 25% decline in the second quarter. This would be the sharpest annual downturn since 1706, according to historical Bank of England data.

Given the assumed relaxation of social distancing measures, however, the BOE expects the fall in GDP to be temporary and followed by a rapid recovery.

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It sees GDP hitting its pre-Covid levels in the second half of 2021 and growing by 3% in 2022. However, it stressed that these projections were contingent on domestic and Covid-19 global containment measures.

This BOE's economic outlook scenario also expects unemployment to be at 8% in 2020, 7% in 2021 and 4% in 2022.

Since the beginning of the pandemic, the central bank has cut rates twice from 0.75% to 0.1% along with the £200 billion ($247.55 billion) of quantitative easing, bringing its bond buying program to a total of £645 billion.

"The MPC will continue to monitor the situation closely and, consistent with its remit, stands ready to take further action as necessary to support the economy and ensure a sustained return of inflation to the 2% target," the BOE said in its report.

Last month's PMI (purchasing managers' index) readings plunged to record lows and the U.K. is expected to suffer its deepest economic downturn in living memory as a result of the coronavirus crisis.

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"Nonetheless, because a degree of precautionary behavior by households and businesses is assumed to persist, the economy takes some time to recover towards its previous path," the report said.

"CPI inflation is expected to fall further below the 2% target during the second half of this year, largely reflecting the weakness of demand."

The British government will announce the outcome of its second review of lockdown measures on Thursday, after the U.K. surpassed Italy to record the highest fatality rate in Europe.

As of Thursday morning, the U.K. has recorded more than 202,000 cases of the coronavirus and more than 30,000 deaths.