The Bank of England is expanding its cash-printing scheme by another £100billion – despite suggesting the economy is doing slightly better than the worst predictions.
Governor Andrew Bailey has unleashed another round of quantitative easing, taking the total size of the commitments to £745billion.
The widely-expected move came after inflation figures gave the Bank more wriggle-room to act to pro up UK plc, which is facing the worst recession in 300 years.
But the Bank’s monetary policy committee kept interest rates at the record low of 0.1 per cent.
And there was also a glimmer of hope as it said GDP might not fall as much this quarter as feared, thanks partly to a recovery in consumer spending and the housing market.
The plunge might only be around 20 per cent, significantly smaller than the 27 forecast in May’s report.
Economic experts believe the Bank of England’s money-printing programme could reach £1trillion during the coronavirus pandemic
QE involves pumping money into the financial system by buying up assets such as Government bonds – or gilts.
As the Office for National Statistics yesterday announced inflation fell to a four-year low of 0.5 per cent last month – down from 0.8 per cent in April.
The Bank has so far stopped short of introducing negative interest rates.
That would involve charging banks to deposit money at the Bank of England, to encourage them to lend money to businesses and households.
After initially appearing to rule out negative interest rates, Mr Bailey has said the policy was under ‘active review’ during the current crisis.
Official figures have shown the economy shrank by a record 20.4 per cent in April – the first full month of the lockdown.
And data released by the Office for National Statistics hinted at soaring unemployment, with 612,000 workers falling off payrolls between March and May.
But the fledgling signs of revival led one member of the MPC – the Bank’s chief economist Andy Haldane – to hold off from voting for more QE.
In minutes of the MPC meeting, the Bank said: ‘The emerging evidence suggested that the fall in global and UK GDP in the second quarter would be less severe than set out in the May report.’
It said the ‘recovery in demand and output was occurring sooner and materially faster than had been expected at the time of the previous MPC meeting’.
It added: ‘If this persisted, cumulative output losses over the policy horizon could plausibly have halved compared with what had been expected at the time of the May report.’
Following the 6% fall in GDP in March and 20.4% plunge in April, the UK economy has begun bouncing back in May and June as lockdown restrictions have eased, according to the Bank.
But it warned there were risks of ‘higher and more persistent’ unemployment following the crisis and that the path of recovery was still unclear.
It said it ‘stands ready to take further action as necessary to support the economy’.
In the minutes, the Bank also revealed that banks had been slower than expected to cut mortgage rates in response to base rate cuts since March.
The pound was down 0.5% at 1.25 US dollars and 0.4% lower at 1.11 euros after the rates decision.
Economists said the pace of QE expansion was likely to slow sharply, with the Bank stating it would complete the latest £100 billion only by the ‘turn of the year’.
But Samuel Tombs at Pantheon Macroeconomics said: ‘We doubt this is the last QE extension.
The Bank has warned that the UK faces its worst recession in 300 year but also believes it can bounce back, with Governor Andrew Bailey (pictured) set to introduce another round of quantitative easing today to relieve the economy of financial worries
‘Unemployment looks set to rise sharply in the second half of this year and to fall back slowly thereafter.
‘We look for a further QE extension of £50 billion in November, but for the committee to hold back from cutting Bank rate below zero, due to the questionable benefits of such a step.’
Suren Thiru, Head of Economics of the British Chambers of Commerce (BCC), said the extra QE ‘reflects the unprecedented impact of coronavirus on the UK economy’.
‘It is vital that the Bank works with financial institutions to ensure that it translates into on the ground support for businesses.
‘With economic conditions likely to remain challenging in the near term, further easing remains likely. However, with interest rates already at an historical low, extra loosening of monetary policy is unlikely to provide a significant boost to the economy. The central bank has rightly decided against moving interest rates into the negative, which risks doing more harm than good.
‘The focus instead should be on delivering a fiscal environment that limits economic scarring and helps kickstart a recovery.’