LONDON: The Bank of England (BoE) today unveiled an extra £100 billion (RM535 billion) of cash stimulus to prop up Britain's coronavirus-hit economy, despite a slump less severe than first thought.
The BoE, reporting the outcome of a regular meeting, said policymakers voted by a majority of 8-1 to hike the central bank's quantitative easing (QE) stimulus by the equivalent of US$126 billion or €112 billion.
The nine-member Monetary Policy Committee (MPC) panel voted unanimously to leave the central bank's key interest rate at a record-low 0.1%.
The pound held steady after the cash infusion to help retail banks lend to businesses – a move analysts said was ultimately aimed at avoiding deflation – a spiral of falling prices.
The QE expansion was widely forecast after the UK economy contracted by one fifth in April amid a nationwide lockdown to try and halt the spread of the coronavirus outbreak. Yet policymakers believe that the economy will fare better than anticipated as lockdown restrictions are relaxed.
After UK gross domestic product contracted by around 20% in April, "evidence from more timely indicators suggests that GDP started to recover thereafter", said minutes of the BoE meeting.
"Payments data are consistent with a recovery in consumer spending in May and June, and housing activity has started to pick up recently," they added.
Policymakers conceded however that "the labour market has weakened materially", while they expect an increasing number of workers to be furloughed – or have wages backed up by the state – in the second quarter.
The BoE's latest cash injection means that £745 billion in QE is swirling around the UK economy to boost growth – as a result of economic shocks consisting of the global financial crisis, Brexit uncertainty and the Covid-19 outbreak.
The BoE had already added £200 billion of QE stimulus in March and slashed borrowing costs to the current historic nadir in response to the virus.
BoE governor Andrew Bailey said Britain's economy is recovering a bit more quickly than the central bank thought a month ago as the government eases its Covid-19 lockdown, but news from the labour market is mostly negative,
"As partial lifting of the measures takes place, we see signs of some activity returning," Bailey said after the BoE announced a £100 billion increase in the size of its bond-buying programme but slowed the pace of purchases sharply.
"We don't want to get too carried away by this. Let's be clear, we're still living in very unusual times."
Bailey told reporters that the BoE's plan to stretch its now £745 billion bond-buying programme until around the turn of the year was still faster than anything done by the British central bank prior to the coronavirus crisis.
"We're slowing from ... warp speed to something that by any historical standards still looks fast," he said.
Deputy governor Ben Broadbent said the BoE now estimated that Britain's economy was heading for a roughly 20% contraction over the first and second quarters of 2020, compared with a fall of about 27% included in a scenario it published last month.
Broadbent said negative news from Britain's labour market was probably more significant for the inflation outlook – which is central to the BoE's mandate – than then pick-up in activity.
On negative interest rates, Bailey repeated previous comments that they were an option for the BoE, but that the issue was complex and taking borrowing costs below zero was not in any way imminent.
Under QE, the central bank purchases assets such as government and corporate bonds to stimulate lending and economic activity.
"With inflation plunging nearly as fast as Britain's reeling economy, the Bank of England is having to spray even more emergency cash around," noted Ulas Akincilar, head of trading at the online platform INFINOX.
"Clearly the primary goal of the bank's latest dose of monetary stimulus is to keep the most at-risk sectors from falling into an economic abyss.
"But there's an important subtext behind the extra £100 billion – to keep at bay the looming prospect of deflation," he added.
When prices drop over a period of time, consumers usually hold off purchases in the hope that they will fall even further, causing businesses to close.
Analysts have warned that British unemployment will surge further later this year when the government turns off the taps.
The Treasury has launched its own multi-billion-pound measures to help those affected by the current economic fallout – notably its costly jobs retention scheme helping 9.1 million people at the last count. However its furloughing is due to end in October. – AFP, Reuters
source https://www.thesundaily.my/business/bank-of-england-pumps-out-extra-100b-stimulus-YX2606450
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