The Bank of England has announced it will pump an additional £150bn into the economy as a second national lockdown begins.
In its latest report on the UK economic outlook, the Bank’s Monetary Policy Committee warned that a range of indicators suggest that consumer spending has softened, firms’ investment intentions “remained weak” and unemployment has increased.
The Bank expects the economy to shrink 2 per cent in the final three months of 2020, before beginning to recover at the start of 2021 meaning the UK would narrowly avoid a “double-dip” recession.
In response to the bleaker outlook, the MPC voted in favour of printing £150bn, which will extend its asset purchase scheme to £875bn. The newly created money will be used to buy up government debt, a move designed to keep borrowing costs low.
As expected, the MPC kept interest rates on hold at 0.1 per cent.
Developments relating to Covid-19 will reduce spending more than the Bank forecast in August and is forecast to pick up again in early 2021, the MPC said, adding that the recently extended furlough scheme would reduce the number of jobs at risk.
“The extended Coronavirus Job Retention Scheme and new Job Support Scheme will mitigate significantly the impact of weaker economic activity on the labour market,” the MPC said.
However, it expects the unemployment rate to jump from 4.5 per cent to a peak of 7.75 per cent between April and June next year. The official measure of joblessness has kept relatively low but the most recent official figures showed a sharp rise in redundancies while the total number of hours worked each remains well below pre-pandemic levels.
Brexit and the coronavirus pandemic mean that the economic outlook remains unusually uncertain, the MPC said.
“It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom.
“It also depends on the responses of households, businesses and financial markets to these developments.”
The Chancellor Rishi Sunak is also expected to announce further support for the UK economy later this afternoon.
It comes days after Mr Sunak extended the furlough scheme through November to help struggling employers pay their staff during a new lockdown across England.