The Bank of England on Thursday cut its growth forecasts for 2021 but predicted a rapid vaccine-driven rebound for the UK economy later in the year.
The central bank’s revisions to its forecasts reflect the toll new strains of COVID-19 and associated lockdowns have taken on the economy in the short-term, but rising optimism about the potential of COVID-19 vaccinations to end restrictions. The pound rallied on the announcement.
The Bank of England’s Monetary Policy Committee (MPC) held interest rates unchanged on Thursday and left its programme of unconventional monetary policy unchanged. Economists had forecast no changes from the first policy meeting of 2021
The MPC voted unanimously to hold the UK’s interest rate at 0.1%, where it has been since last March. The Bank of England’s £875bn ($1.19tn) programme of government bond buying was left unchanged, as was the £20bn asset purchase facility for corporate bonds.
The Bank of England’s quarterly monetary policy report was published alongside policy decisions and showed the central bank had downgraded its forecasts for growth in 2021. Policy makers now predict the UK economy will grow by just 5% this year. In November, the Bank of England had forecast growth of 7.25%.
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The MPC said growth at the end of 2020 was “materially stronger than expected in the November Report” and forecast modest growth in the final quarter of the year.
However, mutations of COVID-19 forced the UK back into a lockdown at the start of January. Policymakers said that, while the current lockdown was not as economically damaging as restrictions last March, UK GDP was likely to contract by 4% in the first three months of the 2021.
Despite worse prospects in the short-term, the successful and rapid rollout of coronavirus vaccines across the UK means the MPC are optimistic about the growth prospects for the UK later in the year.
“Vaccination programmes are under way in a number of countries, including the United Kingdom, which has improved the economic outlook,” the committee said.
10 million people in the UK have so far received their first dose of a COVID-19 vaccine across the UK, close to 1 in 6 of the population. The government hopes to have inoculated the entire adult population by later in the year.
“GDP is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination programme is assumed to lead to an easing of Covid-related restrictions and people’s health concerns,” the MPC said.
Hopes of strong momentum later in the year led the committee to upgrade forecast for growth in 2022. The the Bank of England now predicts GDP expansion of 7.25% next year. The central bank believes the UK economy will reach pre-pandemic levels by the first quarter of next year.
The MPC also downgrade its forecast for last year’s slump, saying it now believes GDP contacted by 10% in 2020, rather than an earlier forecast of 11%.
“We got a confident outlook – the Old Lady thinks the UK economy will recover quickly to pre-pandemic levels of output over the course of 2021,” said Neil Wilson, chief market analyst at Markets.com.
“It expects spare capacity in the economy to be eliminated as the recover picks up steam this year, which begs the question: is the next move up? I think so, although clearly the Bank is at pains to leave negative rates in the toolkit.”
Notes for the latest MPC meeting show the committee has instructed commercial banks to prepare for the possibility of negative interest rates within six months, although rate setters stressed this was not a signal that the policy would be implemented anytime soon.
The MPC said the outlook remains “unusually uncertain” and said it “stands ready to take whatever additional action is necessary.”