BANK OF ENGLAND SEES SIGNS OF ECONOMIC RECOVERY


The latest insights from the Bank of England’s Lai Wah Co, Deputy Agent for Greater London.

Since the Covid-19 crisis began, the Bank has taken extraordinary measures to support employment and economic activity in the UK.

We have cut Bank Rate from 0.75% to 0.10%, allowing businesses and households to borrow more cheaply.

Through our new bank-funding scheme (the TFSME), we are giving banks incentives to pass that Bank Rate cut on to their customers and keep lending to small- and medium-sized businesses.

And we are injecting a total of £300 billion of new money into the economy via quantitative easing, or QE, to support spending by businesses and households.

In its latest Monetary Policy Report, the Bank’s Monetary Policy Committee (MPC) notes encouraging signs that households’ spending has already substantially recovered from a sharp fall in the first half of the year.

Assuming the impact of Covid-19 fades gradually, the MPC’s central expectation is that economic activity will continue to recover, helped by the measures that the Bank and the Government have taken.

As social distancing eases further, households are expected to spend more and businesses to grow more confident in making investment-spending decisions.

Unemployment is likely to rise in the second half of this year, as the Government’s job-retention schemes are wound down.

But it is expected to fall gradually from the beginning of next year onwards, as the economic recovery continues.

Inflation is expected to fall further below the 2% target later this year, partly because of the effects of a temporary cut in VAT and recent falls in the price of oil.

As these effects unwind and the recovery continues, inflation is expected to return to target over the following few years.

The future path of the economy remains unusually uncertain, however.

It will depend on how the pandemic develops, the measures taken to protect public health, and how governments, households, and businesses respond.

Because the MPC sees substantial risks to its expectations, it does not intend to withdraw any support until there is clear evidence of further recovery in activity and inflation.

And it stands ready to provide further support, if necessary.

In its latest Financial Stability Report, the Bank’s Financial Policy Committee (FPC) notes that banks have been playing a major role in supplying the credit necessary to get UK businesses and households through this crisis.

The FPC judges that the major banks, while they cannot be infinitely resilient, are resilient across a very wide range of possible paths that the economy could take.

The banks therefore have the resilience, and it is in their collective interest, to continue to support businesses and households. At the Treasury’s request, the FPC will consider how the financial system could even better support the supply of finance to UK businesses.

The Financial Stability Report also contains updates on work being done to reduce other risks across the financial system, including those related to potential disruption at the end of the current Brexit transition period and the move to reduce reliance on Libor-linked contracts.

However the economy evolves and the risks to monetary and financial stability change, the intelligence we gather from our contacts in Greater London will remain crucial in shaping our policies for the good of the people of the UK.

Lai Wah Co, Bank of England Deputy Agent for Greater London