In the Bank of England’s latest update to West London Business, Lai Wah Co deputy agent for greater London outlines the banks support for the UK economy…
The Covid pandemic has reduced levels of economic activity across the UK this year.
Households and businesses have generally been spending and investing less than they were before the pandemic struck.
This fall in spending and investment risks significant job losses as many businesses face much lower demand for their goods and services.
Although households’ spending picked up over the summer, when social-distancing restrictions were loosened, it remained well below normal levels.
And the recent pick-up in Covid cases will likely reduce spending and investment further.
Government schemes have significantly reduced the impact on jobs, but unemployment is expected to rise further over the coming few months.
The Bank of England’s Monetary Policy Committee (MPC) has responded with a strong package of measures to support the economy.
Earlier this year, the MPC cut Bank Rate to a record low of 0.1%.
Because interest rates on many business loans and mortgages are linked to Bank Rate, businesses’ and households’ borrowing costs tend to fall when it’s cut.
Lower borrowing costs encourage businesses to invest and keep their staff in work, and households tend to have more money to spend too.
At its latest meeting on 5 November, the MPC decided to keep Bank Rate at 0.1%.
The MPC has also been injecting new money into the UK economy through quantitative easing (QE).
Buying government bonds with this new money helps to keep interest rates on mortgages and business loans low.
At its November meeting, the MPC announced a further £150 billion of QE, taking the total announced this year to £450 billion.
Given the measures taken by the Bank, and the substantial support being provided by the Government, the MPC expects economic activity to start to recover again soon, assuming the impact of Covid fades.
Leaving the EU Single Market and Customs Union is expected to have an impact on the economy next year.
Adjusting to a new UK-EU trading relationship, which in the MPC’s forecast is assumed to be similar to the trading relationship between the EU and Canada, will temporarily lower the pace of recovery in the first half of next year.
But the recovery is still expected to continue steadily over the coming few years, assuming the impact of Covid does fade, as households and businesses grow more confident to spend and invest.
The recovery in spending and investment is expected to cause inflation to rise back to the 2% target level that the Government has set the MPC.
Inflation is currently well below target, in part due to the effects of Covid—for example, the pandemic has caused world oil and gas prices to fall.
The MPC’s analysis and forecasts are set out in detail in the Monetary Policy Report it published alongside its Bank rate and QE decisions.
The Monetary Policy Report was published before reports of the development of an effective vaccine.
While this is good news that could dramatically reduce uncertainty for households and businesses, the future path of the economy still remains unusually uncertain.
A lot will depend on how the Covid pandemic develops and how governments, households, and businesses respond.
Because the MPC sees substantial risks to the outlook, it has stated it does not intend to withdraw any of the support it is providing until there is clear evidence that inflation and the economy are recovering.
And it stands ready to provide further support, if judged necessary.
The evidence that I and my fellow Agents gather from our contacts in Greater London and across the UK will continue to play a crucial part making sure the Bank’s policymakers are kept fully informed.