U.S. Markets

Bank of England to keep policy on hold as COVID prognosis murky

LONDON (Reuters) - Britain’s central bank will shed more light next week on how fast it expects the economy to rebound from the financial damage wrought by COVID-19, but is unlikely to add to the 100 billion pounds ($131 billion) of stimulus it announced in June.

FILE PHOTO: A street sweeper cleans outside the Bank of England as the spread of the coronavirus disease (COVID-19) continues, London, Britain, March 31, 2020. REUTERS/John Sibley

The world’s sixth-largest economy shrank by almost a quarter between February and May, and some economists think it could be years before it returns to its previous size.

Back in May the Bank of England (BoE) said its best guess was that the economy would return to its previous size in the second half of 2021, but since then several policymakers have warned this relatively ‘V’-shaped recovery could be delayed.

The BoE said stimulus announced in June would fund bond purchases until the turn of the year - albeit at a slower pace than before - which in the view of Investec economist Philip Shaw makes November rather than August the next key decision.

“For now, we’re at: ‘Okay, let’s set the tiller steady ... keep rates on hold, and just see what’s going on in the economy’,” he said.

Economists polled by Reuters last week on average predicted the BoE would keep the Bank Rate at its record low of 0.1% this year and next, but that policymakers would announce 70 billion pounds of asset purchases in November or December.

Initial signs of recovery have been fairly promising, with retail sales almost back at pre-pandemic levels in June, and closely watched Purchasing Managers’ Index data suggesting the fastest growth since 2015 in July.

BoE chief economist Andy Haldane described the recovery as “so far, so ‘V’”, after voting against June’s stimulus.

But BoE policymakers such as Jonathan Haskel and Silvana Tenreyro have warned of the economy “getting stuck” or seeing an “incomplete ‘V’”, once an initial boost from pent-up consumer demand falters and households remain wary of COVID dangers.

While finance minister Rishi Sunak announced temporary tax cuts this month to encourage people to eat out in restaurants, stay in hotels and buy new homes, health minister Matt Hancock has warned of the risk of a second wave of infection.

Unemployment is likely to rise sharply in November after the end of a government furlough scheme that has supported 9.5 million jobs, unless there is a revival in restaurants and entertainment venues where almost half of staff are furloughed.

The BoE’s latest forecast for unemployment will be closely eyed, after it pencilled in a jump in the fourth-quarter jobless rate to nearly 10% in May, exceeding the peak in the 2008-09 financial crisis.

Governor Andrew Bailey is also sure to be asked about the BoE’s latest thinking on cutting interest rates below zero - something he has said the BoE will consider, but which is far from a certainty due to practical difficulties.

“Banks have to have time to implement a possible negative rate structure, and there are all sorts of technical complications as well,” Shaw said.

Reporting by David Milliken; Editing by Mark Potter