UK economy may need further stimulus says the Bank of England

To help combat the coronavirus pandemic's impact, the Bank of England (BoE) may have to ease monetary policy further. That's the view of Michael Saunders, a member of the Bank of England's Monetary Policy Committee.

During a fairly downbeat online webinar, the bank official outlined the economic challenges ahead that would necessitate such a move. He predicted that unemployment would rise significantly as furlough schemes wind down (BoE forecasts the jobless rate would almost double to 7.5% by the end of the year) and that there will be a slower recovery over the next year or two.

Additionally, a persistent COVID scenario might result in a series of local lockdowns. Although less severe than a national lockdown, they have not been cushioned by extra financial support to date.

Challenges

Looking to the future, Saunders commented that the economic outlook will depend in large part on:

1) The dynamics of the disease
2) Possible progress in the development of vaccines and other treatments
3) How businesses, governments and individuals react to these events.

Monetary easing would be needed, he said, to achieve a sustained return of inflation to the 2% target. Then responding to questions after his talk, Saunders added that there was scope to extend the Bank of England's bond-buying plan and that taking interest rates below zero as a form of stimulus is still under review.

Avoiding a Messy End to the Year

Many economists and investors expect the BoE to expand its bond-buying plan later this year (possibly November) because of concerns over unemployment. In the second quarter, the UK experienced the biggest contraction among developed nations.

Among the other threats to the economy are a chaotic departure from Europe. According to Saunders, about 50% of companies believe the UK will have no trading deal in place when the post-Brexit extension phase ends on December 31st.

Although the BoE hasn't yet given the green light to further quantitative easing, Saunders' comments were the clearest signal yet of how the bank will support the economy if it stumbles in the coming months.

September 2020