The Bank of England on Thursday held its benchmark interest rate at 0.1% and chose to maintain its current pace of asset purchases, but warned that the UK faced a “very sharp” fall in economic growth due to the coronavirus pandemic.
While the bank decided not to issue its traditional forecasts, the bank predicted that the country’s gross domestic product (GDP) could shrink by 14% in 2020, noting that there would be a “substantial increase” in unemployment in the first half of 2020.
It said, however, that the decline in economic growth — the worst in 300 years — should be “temporary” and that activity should pick up “relatively rapidly.”
The bank’s Monetary Policy Committee (MPC) voted unanimously to hold the bank rate at 0.1%.
While the committee also voted to continue with its £200bn ($250bn) asset-purchasing programme, two members voted to increase the target for these purchases by £100bn.
Noting that households and businesses would continue to engage in a degree of precautionary behaviour even once coronavirus restrictions are relaxed, the bank said the economy would still take “some time” to recover towards its previous path.
In what it calls its “illustrative scenario,” which assumes that social distancing measures and government support schemes remain in place until early June before being “gradually unwound” by the end of the third quarter, output could drop by almost 30% in the first half of the year before rebounding by 15% in 2021.
“The unprecedented situation means that the outlook for the UK and global economies is unusually uncertain. It will depend critically on the evolution of the pandemic, and how governments, households and businesses respond to it,” the bank said.
The central bank also said that inflation could fall to 0.5% next year, before returning to its 2% target in 2022.
In the scenario, the Bank of England said that UK companies could face a cashflow deficit of £140bn ($175m) in the coming financial year, up from the usual £80bn.
Separately, a new stress test found that UK banks and building societies are in a good position to withstand the near-total collapse in the country’s economy.
In response to the coronavirus crisis, the central bank in recent weeks slashed interest rates to record low levels, dramatically stepped up asset purchases under its quantitative easing programme, and introduced cheap funding for banks to loan to businesses.
The bank also expanded an overdraft-like facility used by the UK government, allowing it to directly fund the country’s additional spending during the crisis.
Bank of England governor Andrew Bailey said on Thursday, however, that the Ways and Means facility had not been used by the government thus far in the crisis.