The Bank of England has launched another £100 billion of economy-boosting action to help combat the “unprecedented” shock from Covid-19 as it warned over a looming jobs crisis.
The Bank said the impact of the coronavirus lockdown may have been “less severe” between April and June than first feared as restrictions have begun to be lifted.
But Governor Andrew Bailey cautioned against getting “carried away” by signs the recession may not have been quite as steep as it expected.
The Bank said there are risks of “higher and more persistent” unemployment following the crisis and that the path of recovery is still unclear.
Mr Bailey said: “As partial lifting of restrictions takes place, we do see signs of some activity returning.
“We don’t want to get too carried away with it – we are still living in very unusual times.”
Members of the Bank’s Monetary Policy Committee (MPC) voted eight to one to expand its quantitative easing (QE) programme to £745 billion, following the extra £200 billion announced in March.
The Bank held interest rates at an all-time low of 0.1% and confirmed there had been no discussion at the meeting of taking rates below zero – despite mounting speculation over such a move.
Mr Bailey said negative rates are still being actively assessed and the Bank “won’t rule anything in or anything out”.
The extra QE – which sees the Bank buy Government bonds from investors, pumping money into the economy in the process – comes after official figures showed the economy contracted by a record 20.4% in April.
But the Bank said the fall in gross domestic product (GDP) between April and June may not be as bad as it set out in gloomy May forecasts, thanks partly to a recovery in consumer spending and the housing market.
It now believes the plunge in UK GDP over the first six months of 2020 may be around 20%, rather than the 27% it forecast in May’s report.
This led one of the MPC members – the Bank’s chief economist Andy Haldane – to hold off from voting for more QE.
In minutes of the MPC meeting, the Bank said: “Following the imposition of social distancing measures, monthly GDP data for April had confirmed that the reduction in activity related to the Covid-19 shock would be unprecedented in scale.
“However, the latest indicators for May and June suggested that the weakening of the UK economy in the second quarter of the year was likely to be less severe than expected at the time of the May Monetary Policy Report.”
It said the “recovery in demand and output was occurring sooner and materially faster” than expected last month.
But Mr Bailey said recent worse-than-expected jobless data – and fears that many furloughed employees may not be taken back on – raises worries over longer-term scarring in the economy.
Economists said the pace of QE expansion is likely to slow sharply, with the Bank stating it will complete the latest £100 billion only by the “turn of the year”.
But Samuel Tombs at Pantheon Macroeconomics said: “We doubt this is the last QE extension.
“Unemployment looks set to rise sharply in the second half of this year and to fall back slowly thereafter.
“We look for a further QE extension of £50 billion in November, but for the committee to hold back from cutting Bank rates below zero, due to the questionable benefits of such a step.”