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Coronavirus: Bank pumps £100bn into UK economy to aid recovery

Two people with facemasks outside shop Image copyright PA Media

The Bank of England will pump an extra £100bn into the UK economy to help fight the "unprecedented" coronavirus-induced downturn.

Bank policymakers voted 8-1 to increase the size of its bond-buying programme.

However, they said there was growing evidence that the hit to the economy would be "less severe" than initially feared.

The Bank's Monetary Policy Committee (MPC) also kept interest rates at a record low of 0.1%.

The move comes just days after Bank governor Andrew Bailey said policymakers were ready to take action after the economy suffered its biggest monthly contraction on record.

The UK economy shrank by 20.4% in April, while official jobs data showed the number of workers on UK payrolls fell by more than 600,000 between March and May.

The Bank said more recent indicators suggested the economy was starting to bounce back.

Minutes from the MPC's June meeting said: "Payments data are consistent with a recovery in consumer spending in May and June, and housing activity has started to pick up recently."

However, Mr Bailey warned that the outlook for the economy remained uncertain. He said: "We don't want to get too carried away by this. Let's be clear, we're still living in very unusual times."

The minutes added: "While recent demand and output data had not been quite as negative as expected, other indicators suggested greater risks around the potential for longer-lasting damage to the economy from the pandemic."

Back in May, policymakers warned the economy was heading for its sharpest recession on record.

Scenarios drawn up by the Bank suggested the economy could shrink by 25% in the three months to June.

However, the MPC said more recent evidence suggested the contraction would be less severe.

The extra monetary stimulus - known as quantitative easing (QE) - will raise the total size of the Bank's asset purchase programme to £745bn.

Policymakers said the injection would help to support financial markets and underpin the recovery.

However, Andy Haldane, the Bank's chief economist, voted against the increase.

He said the recovery was happening "sooner and materially faster" than the Bank expected in May.

Slow recovery

Policymakers said the jobs market was likely to remain weak for some time, with a risk of "higher and more persistent unemployment".

Millions of workers have already seen their pay packets shrink as a result of lower pay for furloughed employees. A survey by the Bank said other companies had postponed or cancelled pay rises this year.

Mr Bailey said: "Even with the relaxation of some Covid-related restrictions on economic activity, a degree of precautionary behaviour by households and businesses is likely to persist. The economy, and especially the labour market, will therefore take some time to recover towards its previous path."

Weak inflation

Mr Bailey also addressed the recent fall in UK inflation in an open letter to Chancellor Rishi Sunak.

Inflation, as measured by the consumer prices index (CPI), fell to 0.5% in May, from 0.8% in April - well below the Bank of England's 2% target.

Mr Bailey said weak inflation had been by driven by falling oil and energy prices, as well as a global drop in economic activity.

The Bank expects inflation to return to target within two years.

Samuel Tombs of Pantheon Macroeconomics expects the Bank to increase QE again later this year.

"Unemployment looks set to rise sharply in the second half of this year and to fall back slowly thereafter," he said.

"The resulting prolonged weakness in domestically generated inflation likely will necessitate the MPC doing more to stimulate the economy in the winter."

The Bank of England has increased its support for the economy, despite it assessing that the outlook is not quite as awful as its scenario last month. The economy is on course for a hit in the second quarter of about 20% compared with the final three months of 2019. That's still historic, and off the scale, but not quite as extreme as the 27% it predicted in May.

The extra £100bn of purchases of government bonds also has the air of an insurance policy.

Most of the MPC were concerned about a couple of factors, A less awful outlook does not mean the recovery will be quick. This is for two reasons stretching beyond economics.

There is a fear that the "prevalence of the virus" in the UK will mean that Britons will continue to socially distance, voluntarily, holding back the recovery more than other nations (Germany would be an example).

Related to that was the idea that more QE now could mitigate the economic impact of "higher rates of Covid-19 infection going forward" - a second wave.

So the news is still bad, but less awful. But risks beyond the purely economic led to more billions being injected into the economy.

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