The Bank of England (BoE) has voted to drive an extra £100bn into the UK economy to save it from the Coronavirus led decline - taking the total bond buying support package to £745bn
The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain Bank Rate at 0.1% and to continue with the existing programme of £200bn of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves.
The Committee voted by a majority of 8-1 to increase the target stock of purchased UK government bonds, by an additional £100bn, to take the total stock of asset purchases to £745bn.
Covid-19 economic effect
UK GDP contracted by around 20% in April, following a 6% fall in March. Evidence from more timely indicators suggests that GDP started to recover thereafter, according to the Bank of England.
Payments data are consistent with a recovery in consumer spending in May and June, and housing activity has started to pick up recently. The Labour Force Survey (LFS) unemployment rate was unchanged at 3.9% in the three months to April.
Following stronger than expected take-up of the Coronavirus Job Retention Scheme, a greater number of workers are likely to be furloughed in the second quarter.
Evidence from business surveys and the Bank’s Agents is consistent with a weak outlook for employment in coming quarters. Some households are also worried about their job security.
The summary of the MPC meeting says: ‘The unprecedented situation means that the outlook for the UK and global economies is 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.’
Alex Tuckett, senior economist at PwC, said: ‘The Bank of England (BoE) today voted 8-1 to undertake a further £100bn of QE purchases, buying government bonds with newly created money to support financial markets and the UK economy. This was widely expected by market commentators, with the previous program of QE scheduled to be completed by the end of June.
‘Although less bad than the BoE's scenario, the GDP data for April released last week has underlined the challenges facing the UK economy, as has the labour market data released earlier this week.
‘And with inflation falling sharply, the MPC will remain focused over the coming months on supporting the economic recovery as Covid-19 restrictions are gradually lifted.
‘The BoE is currently conducting a review into the pros and cons of negative rates as a policy tool, and should the economy take another turn for the worse, the MPC will undoubtedly look at their options for providing fresh stimulus.’
The MPC said it 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 Committee will keep the asset purchase programme under review.