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'Good news' as Bank of England predicts bumper year for growth

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·Senior City Correspondent, Yahoo Finance UK
·5-min read
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Bank of England in the City of London. Photo: Luke MacGregor/Reuters
Bank of England in the City of London. Photo: Luke MacGregor/Reuters

The Bank of England held its monetary policy unchanged on Thursday despite signs of a roaring comeback for the UK economy.

The Bank of England said its nine-person Monetary Policy Committee (MPC) had voted unanimously to keep interest rates unchanged. The UK interest rate has been at a record-low 0.1% since the early stages of the COVID-19 pandemic.

The committee voted 8-1 to maintain its asset purchase facility at £895bn ($1.2tn).

The lack of policy action came as Threadneedle Street painted a rosier picture of Britain's short-term economic prospects. Forecasts for growth were upgraded, unemployment was downgraded, and the Bank said Britain was on track for a summer spending boom.

"There is very strong and good news in the state of the economy at the moment,” Bank of England governor Andrew Bailey told journalists.

Read more: UK services sector posts fastest growth since 2013 in April

The central bank upgraded forecasts in its quarterly Monetary Policy Report and the Bank now expects the UK economy to grow by 7.25% in 2021. It had previously predicted growth of 5%.

The projection means Britain is set for the sharpest annual economic expansion since the 1940s when the economy was recovering from the second world war.

"I don't think we've seen a bounce back like this in modern times," Bailey said. 

The roaring rebound will be powered in part by a consumer spending splurge. Brits have saved up roughly £200bn during the pandemic and the Bank of England doubled its forecast for the amount it expects people to splash out as restrictions ease. The central bank now expects 10% of excess savings — £20bn — to be splurged on going out, holidays, cars, and other purchases.

Chief Executive of the Financial Conduct Authority Andrew Bailey speaking at a press conference at the Bank of England in London, Monday Feb. 25, 2019. (Kirsty O'Connor/Pool via AP)
Bank of England governor Andrew Bailey. Photo: Kirsty O'Connor/Pool via AP

The UK has been easing lockdown measures in recent months and is on track to fully reopen by mid-June. Fast data had suggested Britain's economy was booming as restrictions eased, leading to speculation ahead of Thursday's announcement that the Bank would increase its forecasts.

The rosier economic picture prompted the Bank of England to downgrade its unemployment forecast. The central bank now expects unemployment to peak at 5.5% later this year, compared to an earlier estimate of 7.75%. The downgrade was driven by better-than-expected GDP and the extension of the government's furlough programme.

Watch: What are the risks of investing in cryptocurrency?

Read more: What Andy Haldane's departure means for the Bank of England

The MPC said a lockdown-driven slump in GDP at the start of 2021 had been less bad than feared and the economy was bouncing back faster than expected.

"GDP is expected to rise sharply in 2021 Q2, although activity in that quarter is likely to remain on average around 5% below its level in 2019 Q4," the MPC said. "GDP is expected to recover strongly to pre-Covid levels over the remainder of this year in the absence of most restrictions on domestic economic activity."

While this year's GDP forecast was upgraded, the long-term growth profile remained relatively unchanged. The Bank of England downgraded its forecast for GDP growth next year from 7.25% to 5.75%, reflecting the fact that much of the COVID recovery is now expected to happen this year. A forecast of 1.25% growth in 2023 was left unchanged.

“Let’s not get carried away," Bailey said. "It takes us back, by the end of this year, to the level of output we had essentially at the end of 2019, pre-COVID. That is good news in the context of where we’ve been, but another way of expressing that is two years of output growth have been lost."

The Chief Economist of the Bank of England, Andy Haldane, listens from the audience at an event at the Bank of England in the City of London, London, Britain April 27, 2018.  REUTERS/Toby Melville
Chief Economist of the Bank of England, Andy Haldane. Photo: REUTERS/Toby Melville

Economists had predicted no policy changes from the Bank of England but there was speculation the central bank could begin to talk about removing support measures in light of the strong recovery. 

The Bank of England last year announced a programme of emergency bond buying to support the economy that eventually totalled £875bn. The programme was maintained on Thursday but the Bank said it would slow the speed of its bond buying. Monthly purchases will reduce from just over £13bn a month to just over £10bn.

While the size of the programme was unchanged, Andy Haldane, the Bank of England's chief economist, voted to curtail the support to £845bn. Haldane — an arch-Hawk — was the lone voice on the committee pushing for a reduction.

Haldane has publicly said he worries that cheap money will lead to runaway inflation as economic restrictions ease. The MPC said in its statement it expects inflation to shoot past 2% later this year but only temporarily. The committee added that there was still an unusually high degree of uncertainty given the backdrop of the pandemic.

"The outlook for the economy, and particularly the relative movement in demand and supply, remains uncertain," the MPC said. "It continues to depend on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments."

Watch: What are negative interest rates?

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