Bank trims forecast on job losses as it eyes recovery
Governor rows back from negative interest rates but warns that a second wave could snub out revival
FEWER jobs will be destroyed by the coronavirus crisis than first feared – but Britain’s fragile recovery could be derailed by a second wave of infections, the Bank of England has said.
Unemployment is predicted to hit 7.5pc, below the Bank’s 9pc forecast in May and also below its 8.5pc peak in the aftermath of the financial crisis.
The country suffered a shallower lockdown recession than initially thought and recovery is now under way after businesses reopened and shoppers began to spend again, although the Bank expects the economy to take longer than previously hoped to regain its pre-Covid peak.
The upbeat predictions helped push sterling to $1.32, its highest level since before the pandemic struck.
Although the jobless rate would imply an extra 1.2m people out of work, the peak would be modest by historical standards and well below the record of 12pc hit in the Eighties.
However, economists said the latest forecasts could be over-optimistic as the taxpayer-funded furlough scheme protecting as many 9.6m jobs is due to be wound up in October. It is feared this could trigger massive lay-offs as companies scramble to save money.
The Bank itself warned that hopes of a strong rebound could yet be crushed by further uncertainty.
Andrew Bailey, Governor, said: “There are some very hard yards to come, and frankly we are ready to act should that be needed.”
The Bank’s Monetary Policy Committee voted to hold interest rates at 0.1pc and held fire on further expan- sion of its £745bn asset-buying scheme.
The Bank now expects the economy to shrink by 9.5pc this year, shallower than the 14pc slump forecast in May, partly due to a £30bn stimulus package unveiled by Rishi Sunak, the Chancellor, in July to aid the economy.
GDP will still be 5pc lower than its pre-Covid levels by the end of this year and will not fully recover until the end of next year, the Bank said, around six months later than first forecast.
Most analysts expect a more protracted recovery with GDP still 4pc below peak at the end of 2021.
George Buckley, an economist at Nomura, said: “The Bank is optimistic about where unemployment settles.”
The Bank has been looking at the case for opening the door to negative rates, where it charges banks to deposit cash rather than paying out interest.
However, its Monetary Policy Report listed a range of potential problems with the policy and said it could end up hindering the economy instead of encouraging it.
The report said: “Negative policy rates at this time could be less effective as a tool to stimulate the economy.”
Financial markets trimmed bets that interest rates will fall below zero for the first time next year.
Threadneedle Street’s Financial Policy Committee said banks’ losses on loans are likely to be lower than first feared, indicating they can keep lending to support the economy.
It expects credit losses below the £80bn predicted in May and added that balance sheets are more than suf- ficient to absorb the losses.
Meanwhile, last night Mr Bailey said he supported the Chancellor’s decision to end the furlough scheme in October.
“It’s been a very successful scheme, but he’s right to say we have to look forward,” he told the BBC. “I don’t think we should be locking the economy down in a state that it pre-existed in.”