England tackles double-whammy
Stimulus support massively extended to take on covid, brexit effects
london — The Bank of England increased its already huge bond-buying stimulus by a bigger-than-expected £150 billion ($195 billion) as it prepared for economic damage from new coronavirus lockdowns and the looming risk of Brexit.
The move comes on the day that England entered a four-week lockdown to curb a second wave of Covid-19, which is now killing as many Britons each day as it did in May.
The BoE said Britain’s economy was set to shrink two per cent during the fourth quarter as a result, and that the economy would shrink a record 11 per cent over the course of 2020 overall, more than the 9.5 per cent it had forecast in March.
“The outlook for the economy remains unusually uncertain,” the BoE said.
“It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom.”
And in a coordinated move, British finance minister Rishi Sunak ramped up his £200 billion economic rescue programme once again, announcing the latest in a string of expansions of massive government support in an attempt to slow a surge in unemployment.
Ambrose Crofton, global market strategist at JPMorgan Asset Management
The BoE kept its benchmark Bank Rate at 0.1 per cent, as expected in the poll, and made little mention of negative rates while a consultation with banks over the practicalities is underway.
The BoE raised the size of its asset-purchase programme to £895 billion, £50 billion more than expected by most economists in a Reuters poll.
The central bank said that would give it enough firepower to stretch its buying of government bonds through to the end of 2021.
“An extraordinary economic shock warrants an extraordinary policy response,” said Ambrose Crofton, global market strategist at JPMorgan Asset Management.
“The resurgence of the virus in recent months will mean both the government and companies are once again turning to global capital markets to borrow large sums. The Bank’s purchases in these markets will help prevent borrowing costs rising,” he said.
The central bank now expects Britain’s economy to exceed its size before the Covid-19 pandemic only in the first quarter of 2022.
Previously, the BoE had forecast the recovery would be complete by the end of next year.
Unemployment was set to peak 7.75 per cent in the second quarter of next year, much higher than its most recent reading of 4.5 per cent, the BoE said.
Gross domestic product was likely to grow by 7.25 per cent in 2021, weaker than a previous forecast of nine per cent. But its two-year inflation forecast remained unchanged at two per cent, the central bank’s target.
Britain’s economy has been supported by a surge in debt-fuelled spending by the government. The BoE is buying up many of those bonds.
Sunak acts
Sunak extended the government’s costly coronavirus furlough scheme, which provides 80 per cent of the pay of temporarily laid-off workers, until the end of March, and said he would provide billions of pounds of other jobs support.
“It’s clear the economic effects are much longer lasting for businesses than the duration of any restrictions, which is why we have decided to go further with our support,” Sunak told parliament.
As well as the furlough extension, Sunak increased support for self-employed people and raised guaranteed funding for Scotland, Wales and Northern Ireland by £2 billion to £16 billion.
Britain is heading for a budget deficit of around 20 per cent of gross domestic product in the current financial year, double its level after the global financial crisis and its highest since World War II. Despite the spending, the country faces the worst peak-totrough contraction of any Group of 20 economy, Moody’s said on October 16 when it cut Britain’s credit rating.
The furlough policy will be reviewed in January to see whether employers are able to increase their contributions from their current level of five per cent of total employment costs, or about £70 per employee per month.
The scheme supported nearly nine million jobs at one point and had been forecast to cost around £52 billion over its eight-month lifespan, before the latest extensions. The finance ministry said evidence from the first lockdown showed that the economic effects were much longer lasting for businesses than the duration of restrictions. —
Spent to support laid-off workers in a span of 8 months