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Financial News: Bank Of England Maintains Stimulus; Signals More Easing

Bank Of England Maintains Stimulus; Signals More Easing

05/07/2020 - 08:10:00 (RTTNews)

(RTTNews) - The Bank of England maintained its key interest rate at a record low and refrained from unveiling additional quantitative easing, on Thursday, as the economic outlook remains uncertain due to the impact of the coronavirus, or Covid-19, pandemic.

However, Governor Andrew Bailey kept the door open for further easing as the economy is set to contract the most in more than 300 years due to the lockdown announced to curb the spread of coronavirus, or Covid-19, that hurt on all forms of economic activity.

The nine-member monetary policy committee of BoE voted unanimously to maintain Bank Rate at 0.1 percent. The bank had altogether reduced the rate by 65 basis points at two unscheduled meetings in March to combat risks posed by coronavirus to the economy.

The committee voted by a majority of 7-2 to continue with quantitative easing of GBP 645 billion. Jonathan Haskel and Michael Saunders sought an increase in the target for the stock of asset purchases by an additional GBP 100 billion.

The policymakers judged that the existing stance of monetary policy is appropriate.

"However the economic outlook evolves, the Bank will act as necessary to deliver the monetary and financial stability that are essential for long-term prosperity and meet the needs of the people of this country," Bailey said. "This is our total and unwavering commitment."

Markets expect the BoE to ramp up stimulus in June before the current quantitative easing programme runs out.

Paul Dales at Capital Economics, said the notion that the MPC would expand QE by around GBP 100 billion at the meeting in June looks pretty good. If anything, over the coming months and years, the MPC will probably end up doing much more than that, the economist added.

In the Monetary Policy Report, the bank said the GDP is expected to be close to 30 percent lower in the second quarter of 2020 than it was at the end of 2019.

The BoE warned that GDP could fall by 14 percent in 2020 as a whole before picking up in 2021. Growth is forecast to advance to 15 percent in 2021 and expand around 3 percent in 2022.

As the outlook for the economy depends critically on the evolution of the pandemic and how government responds to it, the MPC has constructed a plausible illustrative economic scenario.

The bank said Covid-19 is dramatically reducing jobs and incomes in the economy. The fall in output has been large and consumer spending has declined sharply. But the disruption will be temporary, the bank noted.

As the social distancing measures are lifted, the economy will recover.

Bailey said the recovery will be much more rapid than the pull back from the global financial crisis.

According to BoE, inflation will fall further below the 2 percent target in the second half of this year, largely reflecting the weakness of demand.

As activity has fallen, the unemployment rate is expected to rise to 9 percent in the second quarter.

According to the desktop stress test, banks would make only GBP 80 billion credit loss in case of an unprecedented economic shock, resulting in financing difficulties for businesses and in rising unemployment.

This was materially lower than the GBP 120 billion of losses banks were able to withstand in the 2019 stress test.

Therefore, UK banks have the financial capacity to withstand the losses, according to interim Financial Stability Report, released Thursday.

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