LONDON: The Bank of England said Thursday that the UK economy will enjoy a stronger-than-expected recovery this year after the government began easing its coronavirus pandemic lockdowns quicker than anticipated.
The improved outlook, which handed support to the pound, comes as the BoE kept its main interest rate at a record-low 0.1 percent following a regular policy meeting this week.
The UK economy is expected to rebound by 7.25 percent this year thanks to “the slightly earlier easing of restrictions” amid vaccine rollouts, the central bank said in a statement as it upgraded its prior guidance of a 5.0-percent expansion.
But it slashed its projection for 2022 to 5.75 percent from 7.25 percent as the government looks to claw back some of its vast pandemic-support outlay with higher taxation. “There are risks around this projection, including from renewed waves of infection in the UK and other countries,” BoE governor Andrew Bailey later told a virtual press conference.
The UK economy tanked by 9.8 percent last year, Britain’s biggest slump in three centuries — and the worst G7 performance — on Covid-19 lockdowns.
“The outlook for the economy... continues to depend on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments,” the BoE said in a statement.
It voted at its Wednesday meeting also to maintain the huge amount of stimulus pumping around the UK economy.
As the pandemic erupted in March 2020, the BoE slashed its key interest rate to a record-low 0.1 percent, where it has remained.
The BoE also began pumping massive sums of new cash into the economy.
The bank has created £450 billion ($626 billion, 522 billion euros) under its quantitative easing stimulus programme since March last year, when Covid-19 prompted Britain’s first coronavirus lockdown.
Prior to this it had pumped hundreds of billions of pounds worth of QE into the UK economy over a decade in the wake of the 2008-09 global financial crisis and Brexit. The central bank’s total QE package stands at £895 billion.
The BoE on Thursday said “developments in global GDP growth have been a little stronger than anticipated, and the substantial new US fiscal stimulus package should provide significant additional support to the outlook”. But it cautioned that “the outlook for the economy, and particularly the relative movement in demand and supply during the recovery from the pandemic, remains unusually uncertain”.
Alongside the BoE support, Prime Minister Boris Johnson’s Conservative government has spent £352 billion in emergency measures since the outbreak of Covid-19. A large part has gone on a jobs furlough scheme that has paid the bulk of private sector wages for millions of workers across the UK.
The BoE on Thursday said it expected unemployment to peak at around 5.5 percent this year, up from the current official level of 4.9 percent.
Annual inflation will meanwhile reach around 2.5 percent, above the central bank’s 2.0-percent target, before falling back down.
Investors are concerned that the reopening of economies and huge government stimulus programmes worldwide will hike inflation, risking higher interest rates down the line.