LONDON (AP) – The Bank of England has unveiled yet another major stimulus package for the UK economy as it seeks to limit the magnitude of the coronavirus recession, which it now thinks will be “less severe” than last month feared.
In a statement on Thursday, the bank’s policy-making panel said it has increased its government bond-buying program by an additional £ 100 billion ($ 125 billion), despite signs of a recent economic improvement as lockdown restrictions are eased. The increase was lower than expected and half of the stimulus announced in March.
The bank had warned in May that the UK economy could end about 27% smaller in the first half of the year than where it started.
Ben Broadbent, the bank’s deputy governor, said on Thursday that the contraction in the first half of the period is likely to be 20% if people start reissuing and the housing market picks up.
While the restrictions are eased, in particular by the reopening in England of shops selling non-essential items such as books, sneakers and toys, the economy is moving into one of the deepest recessions ever. New figures show that the UK economy contracted by 20.4% in April, the first full month of closing.
There are two reasons for the new round of buying government bonds from investors, such as pension funds, to keep interest rates on things like mortgages and loans under control and to keep money flowing during a time of acute stress.
The bank’s monetary policy committee has opted not to send its key interest rate to negative territory on Thursday, keeping it 0.1%, the lowest in the bank’s 326-year history.
Governor Andrew Bailey said that the earnings of negative interest rates – in principle encouraging financial institutions to provide loans by fining them for parking money at the central bank – are being assessed. He said there was no discussion at the meeting.
“We have not excluded anything and we have not excluded anything,” he said.
Bailey warned that unemployment is likely to rise sharply in the coming months as government-funded support programs expire. He did not speculate about the number of jobs to be lost, but said unemployment is likely to be the “steepest path” ever.
Unemployment has not been as high anywhere in the UK as elsewhere, particularly in the United States, mainly due to the government’s Coronavirus Job Retention Scheme, which has in fact isolated the labor market. The UK pays up to 80% of the retained workers’ salaries, up to £ 2,500 ($ 3,125) per month.
Many companies have not cut their jobs. So far, 1.1 million employers have benefited from the scheme to fire 9.1 million people at a cost of £ 20.8 billion for the government. With the scheme ending this fall, there are fears that companies will accelerate job cuts in the summer, raising the unemployment rate from around 4% to well above 10%.
In addition to the stimulus from the bank, the British government is preparing a tax package this summer, possibly with a reduction in sales tax and financing of large transport and green projects.
“In addition to the weight of monetary policy, it is essential to implement a recovery plan that creates jobs and reconstruction opportunities that support long-term sustainable growth,” said Alpesh Paleja, chief economist at the Confederation of British Industry.
Britain has the highest coronavirus death toll in Europe, at more than 42,000, and the Conservative government has been strongly criticized for what many see as its slow, confused response to fighting the pandemic.
Britain also faces economic risks from its historic decision to leave the European Union, which it did in January. It is now in a transition period with the 27-country bloc until the end of the year, when it may face trading challenges if the future relationship is not agreed in time.
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