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Bank of England warns of long term damage to economy

Richard Partington Economics correspondent
Photograph: Ben Gingell/Getty

The Bank of England has warned there are mounting risks of widespread job losses and companies going out of business across Britain as the economic costs of the coronavirus outbreak become more apparent.

Leaving interest rates on hold at the lowest levels in its 325-year history, the Bank said long-term damage to employment and growth was likely as the government steps up its efforts to contain the disease.

Threadneedle Street has already cut interest rates twice this month to 0.1% and pumped more than £200bn into the economy through its quantitative easing programme, in an effort to ease borrowing costs for households and businesses and to calm panicked investors.

In a reflection of the scale of the crisis, the central bank’s rate-setting monetary policy committee declared after its scheduled meeting on Wednesday that it “stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy”.

However, with interest rates near zero, analysts said the Bank would need to further expand its £650bn quantitative easing programme, whereby the central bank buys government bonds from commercial banks and investors to inject money into the economy.

Governments around the world have stepped up their efforts to contain the coronavirus outbreak by severely restricting social and economic activity, and analysts now believe a steep global recession is a near certainty, with the only doubts over how long the crisis will last. Early warning indicators have shown the worst collapse in business activity on record and rising unemployment levels.

The Bank cautioned that it was too early to tell how severe the damage to the economy could be and how well the government’s measures to cushion the blow would work. However, the MPC warned: “Given the severity of that disruption, there is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment.”

It added: “The scale and duration of the shock to economic activity, while highly uncertain, will be large and sharp but should ultimately prove temporary, particularly if job losses and business failures can be minimised.”

With global oil prices falling as the sudden stop in economic activity around the world drags down demand, the Bank said inflation in Britain would probably slide below 1% on the consumer price index, driven by a drop in petrol prices.

However, inflation is expected to rise sharply in future as a result of the pound falling in the past month to its lowest level against the US dollar in 35 years, which will push up the cost of importing goods to Britain.

Analysts at Bank of America warned the pound probably had further to fall to reflect the slump in business activity and rising job losses across the country, adding: “The economic shock looks worse than we feared.”

In an early sign of the job losses across the country, official figures show more than 500,000 people have applied for universal credit benefits within the last nine days. Economists at the consultancy Capital Economics have also warned that UK GDP could plunge by around 15% in the second quarter amid the nationwide lockdown.

Tim Roache, general secretary at the GMB trade union, said the Bank report showed the government urgently needs to provide more support for workers. “Coronavirus is already doing shocking damage to our economy and this could only be the beginning.”

“Continued government action is needed now to steer through these dark times and provide light at the tunnel for economic recovery.”