Bank weighs options as UK teeters on edge of recession
THE Bank of England will decide whether to take more economy-boosting action on Thursday as Britain sits on the brink of a double-dip recession.
Most economists believe the Bank will keep interest rates on hold at 0.1 per cent but could expand its £895billion quantitative easing (QE) bond-buying programme.
It will also report back on the feasibility of negative interest rates.
The latest lockdown will see GDP – a measure of the size of the economy – tumble in the first quarter of 2021.
If it follows on from the previous quarter contraction, it puts the UK on the verge of its first double-dip recession since the 1970s.
Experts seem divided on whether the economy did contract between October and December and some say we may narrowly avoid going back into recession.
A less drastic than feared drop in November’s GDP, when it fell by 2.6 per cent, has fuelled predictions the economy may have proved more resilient.
Recession is defined by two consecutive quarters of falling GDP and the EY Item Club’s winter forecast says it may have flatlined in the fourth quarter, with Britain avoiding a slump.
Item Club economist Howard Archer believes the Bank’s rate-setters may now put further action on the back burner. He believes if the Bank does act on Thursday, it will opt for QE. But he added: “However, I think the odds favour the MPC (Monetary Policy Committee) sitting tight and adopting a wait and see approach.”
Mr Archer said the Brexit deal and vaccine rollout had reduced longerterm risks facing the economy.
He said: “The Bank is more likely to look through the very challenging first quarter and focus more on the brighter prospects from the second quarter onwards.”
The MPC remains split on the issue of negative interest rates and comments from Bank governor Andrew Bailey suggest he is not ready to go down that route.
It is thought adding extra QE could be a less risky tactic for now, with fewer unintended consequences.
Official fourth-quarter GDP figures are not due until February 12.The latest figures show while the jobless rate has hit five per cent for the first time in more than four years, the Government’s furlough scheme is helping to cushion the blow.
Investec economist Philip Shaw thinks more bond-buying could be likely on Thursday. He said: “We would not be surprised if the Bank of England takes out an insurance policy and increases the pace of QE.”