News | Business | UK Economy: Bank of England tempers forecasts for UK economic rebound

Delphine Strauss 

The Bank of England has tempered its previous prediction that the UK economy would rebound swiftly from the recession caused by the coronavirus crisis, saying on Thursday that GDP would not exceed pre-pandemic levels until the end of 2021.
The Monetary Policy Committee left interest rates on hold at 0.1 per cent with its target for the total stock of its asset purchases also unchanged at £745bn.
It said the initial hit from lockdown measures had not been quite as severe as it had projected in May, although it expected output to be more than 20 per cent lower in the second quarter of 2020 than it had been in the final quarter of 2019. A strong recovery in some areas of consumer spending is expected to drive a rapid rebound over the coming months.
The pound rose 0.4 per cent against the US dollar to $1.3160 after the decision, its highest level since the turmoil in March as coronavirus concerns raced through markets.
The MPC was also more optimistic about the outlook for unemployment than it had been in May, predicting the jobless rate would peak at about 7.5 per cent at the end of this year before declining gradually.
Consumer price inflation was expected to fall further below target, averaging about 0.25 per cent in the latter part of the year, and to be around the MPC’s 2 per cent target in two years.
However, in its guidance the MPC emphasised that the balance of risks to its forecasts lay very much to the downside, and said it would not tighten monetary policy “until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2 per cent inflation target sustainably”.
The BoE forecast the recovery would slow dramatically after the third quarter of 2020, reflecting consumers’ continued concerns over health risks and fears over job security. By the end of this year, GDP is expected to remain 5 per cent below its pre-pandemic peak and only to regain its pre-crisis level at the end of 2021.
Even by the end of 2023, when the forecast period concludes, GDP would remain 1.5 per cent below its pre pandemic trajectory, according to the bank. This long-term scarring is because business investment and start-up activity is expected to remain weak, weighing on productivity.
The bank’s Financial Policy Committee said companies continued to face a severe cash-flow shock, with many likely to need further finance to survive the disruption. It predicted that if the economy followed the path set out in the BoE’s central projections, companies could face a cash-flow deficit of up to £200bn in this financial year.
But the FPC said that even with corporate insolvencies set to rise, UK banks’ capital buffers were more than sufficient to absorb losses — unless the loss of output, and the unemployment rate, were double that in the MPC’s central projection.