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Bank of England to focus on recovery hopes even as lockdown drags on

William Schomberg
·3-min read
FILE PHOTO: FILE PHOTO: AA view of The Bank of England and the City of London financial district in London, Britain

By William Schomberg

LONDON (Reuters) - The Bank of England on Thursday is likely to set its sights on the prospects of economic recovery later this year, and any backing it gives to the idea of negative interest rates as a new stimulus weapon will probably be cautious.

The bulk of Britain's businesses are once again hobbled by a third national coronavirus lockdown since the pandemic struck last year, hitting the economy harder than any of the other Group of Seven rich nations, according to official data.

Many firms are also grappling with post-Brexit barriers to trade with the European Union after Britain left the bloc's single market on Dec. 31.

But the BoE is expected to keep its benchmark interest rate on hold at 0.1% at 1200 GMT and refrain from a further increase in its bond-buying programme, which has doubled over the past year to nearly 900 billion pounds ($1.23 trillion).

Governor Andrew Bailey has said progress on COVID-19 vaccines - which have been rolled out in Britain far faster than in the rest of Europe - was "outstandingly good news" and he predicted a pronounced economic recovery.

He has sounded less enthusiastic about the possibility of taking the Bank Rate below zero for the first time, something already done in the euro zone, Japan and elsewhere.

The BoE is due to publish on Thursday feedback from commercial banks about the operational feasibility of negative rates, which Bailey said would change the "whole calculus of how the banking system works" if implemented.

Officials with big British banks have said they would need a year to get ready for such a change.

Consultancy firm Evercore said the BoE might signal that negative rates are feasible from late 2021 but by then they might not be needed as the economy rebounds.

As well as progress on vaccines, the BoE is waiting to see how much more cash finance minister Rishi Sunak will spend on steering Britain's economy towards recovery, having already put the country on course for its biggest ever peacetime borrowing.

Sunak is due to announce his latest plans in a budget statement on March 3.

The BoE is expected to cut its growth forecasts for early 2021 after the latest lockdown. Economists will be watching for any downgrade to its forecast of a bounce-back later in 2021.

In November, the BoE said it expected gross domestic product would grow by 7.25% this year after an 11% slump in 2020.

The BoE also said then it expected inflation to be at its 2% target in each of the next three years.

A Reuters poll of analysts last month showed Britain's economy was expected to take more than two years to recover to its pre-COVID-19 level - longer than the BoE's latest forecast of early 2022 - but rates would be steady until at least 2024.

Investors are waiting to hear if the BoE speeds up the pace of its bond-buying in early 2021, without changing its overall size, to offset the impact of the latest lockdown.

($1 = 0.7332 pounds)

(Writing by William Schomberg; Editing by Mark Heinrich)