— Bank predicts 18% gain in Q3 GDP
By Laurie Laird
LONDON (MaceNews) – The Bank of England maintained its current policy stance at its latest rate setting meeting, but admitted that negative interest rates remain under review, despite forecasting a sharp economic rebound in the third quarter.
Bank forecasters predict an 18% surge in output between July and September, far exceeding the predictions of private sector analysts. The Bank also upgraded its outlook for the second quarter, predicting a 21% contraction, better than the 24% plunge expected in May. However, that’s a much more significant shock than the 12.1% decline in Eurozone GDP over the same period. Official data are scheduled for release on August 12.
The Bank’s Monetary Policy Committee is continuing to assess the efficacy of negative interest rates in the UK, devoting four pages of its most recent Monetary Policy Report to the topic, concluding that “the MPC will continue to assess the appropriate monetary policy stance and will keep the appropriate tools for achieving its remit — including negative policy rates — under review.”
The MPC unanimously agreed to leave its benchmark rate at a record-low 0.1% following its meeting on Tuesday and maintained its asset purchase programme at £745 billion.
Consumer spending has “recovered significantly” since April, with payments data suggesting that July household consumption was less than 10% below its level of that start of the year, while the housing market appears to “have returned to close to normal levels,” according to the MPR. Business investment, which comprises approximately 10% of GDP, was likely to have fallen sharply in the second quarter and has shown little sign of recovery.
The Bank admitted that forecasts risks skew to the downside and cautioned that economic output depends “critically on the evolution of the pandemic [and] measures taken to protect public health.” The UK emerged from economic lockdown on June 15th, but has grappled with localised outbreaks, with regional shutdowns imposed over the past few weeks.
Unemployment is likely to peak at 7.5% by year end, lower than previous Bank forecasts, with some nine million jobs covered by the government’s furlough scheme since April, allowing employees to collect 80% of their pay up to a cap of £2,500 per month. Employers will pick up some of those costs from this month before the programme ends in October. A number of high-profile UK business have announced large layoffs this week, and many economists fear more job losses going into the autumn. The official UK unemployment rate remained at 3.9% in the three months to May, with many furloughed employees considering themselves to be economically inactive rather than jobless. Second quarter labour data are due on August 11th.
Given the spare capacity in the economy, inflation is likely to drift further from the Bank’s 2% target, averaging 0.25% over the “latter part of the year,” according to minutes of the MPC meeting also released Thursday morning. Inflation hovered at an annual rate of 0.6% in June and has remained stubbornly below target for nearly a year.