UK economy gets more help from the Bank of England

The central bank said Thursday that it would increase its bond-buying program by another £100 billion ($125 billion), bringing the total up to £745 billion ($929 billion). The Bank of England said it will reach that target by the end of the year.

The move adds to the trillions of dollars in stimulus already pledged by central banks around the world as policymakers take unprecedented steps to tackle the global recession, falling inflation and extreme unemployment stemming from the pandemic. The Bank of England’s purchases of government bonds are helping the UK government to finance recovery efforts as it borrows record amounts.

The country is in particularly rough shape. It has one of the highest coronavirus death tolls in the world and an economy that is only very gradually emerging from lockdown. UK GDP contracted by more than 20% in April, a record, following a 6% decline in March. The Organization for Economic Cooperation and Development warned last week that the United Kingdom would suffer the worst downturn of any major economy this year.

There are some signs that consumer spending is picking up as restrictions ease, according to the Bank of England, which held its key interest rate at 0.1%. Yet inflation fell back to 0.5% in May, and the central bank warned that it’s difficult to determine the strength of the expected recovery in the second half of the year.

“Even with the relaxation of some Covid-related restrictions on economic activity, a degree of precautionary behavior by households and businesses is likely to persist,” the Bank of England said. “The economy, and especially the labor market, will therefore take some time to recover towards its previous path.”

Britain's biggest companies are cutting tens of thousands of jobs. Millions more are at risk

There’s another huge cloud hanging over the economy and its ability to recover: Britain has set itself a deadline of the end of the year to get a trade deal with the European Union, its single biggest export market. Little progress has been made in talks so far.

The OECD has forecast that the UK economy will shrink by 11.5% this year even if a basic free trade agreement with the bloc is reached and a second wave of infections is avoided.

With the recovery expected to take years, economists predict that more action from the Bank of England will be needed down the line. That’s sparked discussion about whether the central bank could opt to push interest rates into negative territory, a controversial measure already deployed by the European Central Bank and Bank of Japan.

“The need to continue supporting the economy will undoubtedly fuel further discussion about whether negative rates are on the horizon,” James Smith, developed markets economist at ING, told clients Thursday.

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