Improving outlook

Bank: downturn to be ‘less severe’, interest rate held

Bank of England

The Bank of England has revised its forecast (pic: Terry Murden)

The UK’s economic downturn this year will be less severe than initially feared, according to the Bank of England.

It expects the economy to shrink by 9.5% in 2020 compared with an initial estimate of 14%.

The forecast came as the Bank’s monetary policy committee left the interest rate on hold at the record low level of 0.1% and maintained its targeted stock of asset purchases at £745 billion, both agreed by 9-0 votes.

Despite the more positive message, the Bank warned that the jobs market recovery would take longer.

In its first official forecasts since the pandemic hit, the Bank said it expects the economy to grow by 9% in 2021, and 3.5% in 2022, with the economy expected to get back to its pre-Covid size at the end of 2021.

In May the Bank estimated growth of 15% next year and 3% in 2022.

Unemployment is expected to peak at 7.5% at the end of this year as government-funded support schemes come to an end.

The forecasts are based on a gradual easing of lockdown and a largely uninterrupted transition to a new trade agreement with the EU.

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Rain Newton-Smith, CBI chief economist, said: “With interest rates already so close to zero, it’s unsurprising that the Monetary Policy Committee kept its powder dry this time around.

“Despite early signs of a recovery gathering pace, downside risks to the outlook are still looming large, so a “wait and see” approach seems like the right one at present.

“Further monetary stimulus may be necessary if we see additional disruptions to demand or supply, which could happen in the event of more local lockdowns or stalled progress on Brexit negotiations.”

Laura Suter, personal finance analyst at investment platform AJ Bell, said: “The Bank now forecasts that UK GDP will return to its 2019 levels by the end of next year, meaning it’s expecting two lost years of growth for the UK.

“It’s buoyed by the fact that people are getting out and spending more, no doubt fuelled by the summer holidays and lots of people staycationing, while Rishi Sunak’s stamp duty giveaway has also put the rocket boosters under the housing market, with the Bank saying it has returned homebuying to near-normal levels.

“However, the bank paints a bleaker picture on the outlook for employment and business spending … negative interest rates can’t be ruled out. Any rate rise is miles away and savers will continue to see paltry returns on their cash.”

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