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  2. ECONOMY
June 18, 2020 10:46 AM

Bank of England injects further stimulus into economy

Sophie Baker
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    British 20 pound banknotes in London
    Bloomberg
    Bank of England officials Thursday boosted the bank's asset purchase program and voted to maintain interest rates at 0.1%.

    The Bank of England boosted stimulus to the U.K. economy with an additional £100 billion ($131.2 billion) in asset purchases.

    The central bank announced Thursday that its monetary policy committee voted 8-1 to increase its asset purchase program to £745 billion. It also voted unanimously to maintain interest rates at 0.1%.

    The additional purchases will be financed by the issuance of central bank reserves, the bank said.

    While risk-asset prices have recovered from their lows in March, "they have remained sensitive to news on the evolution of the pandemic," a statement by the bank said.

    However, recent data suggest that the fall in global gross domestic product in the second quarter will not be as severe as expected, and there are signs of increased consumer spending and services output, as the U.K. begins to emerge from lockdown. Downside risks remain for the global outlook, however, such as the spread of the coronavirus within emerging market economies and the potential for a second wave of infections in developed markets.

    U.K. GDP contracted by about 20% in April, having fallen 6% in March, the bank said. "Evidence from more timely indicators suggests that GDP started to recover thereafter."

    The labor force survey unemployment rate — a measure of U.K. unemployment — was unchanged in the three months to April at 3.9%, although the bank warned that other indicators suggest the labor market "has weakened materially." The bank also expects a greater number of U.K. employees to be furloughed in the current quarter.

    Consumer price index inflation declined to 0.5% in May, from 0.8% in April and 1.5% in March. The MPC manages monetary policy to an inflation target of 2%.

    See more of P&I's coverage of the coronavirus

    "Current below-target rates of CPI inflation can in large part be accounted for by the effects of the pandemic," the bank said. The collapse in oil prices and a sharp drop in domestic activity have also contributed to downward pressure on inflation.

    "The unprecedented situation means that the outlook for the U.K. and global economies is unusually uncertain. It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these factors," the bank said.

    The bank's decisions did not quite meet market expectations.

    "Market expectations had run ahead of MPC thinking," said Howard Cunningham, fixed-income portfolio manager at Newton Investment Management, in an emailed comment.

    While Newton executives had expected an additional £100 billion stimulus package and no change to interest rates, others had expected a further cut in interest rates to zero and an increase in quantitative easing of up to £150 billion.

    "Whilst the BOE are acknowledging the early signs of a pick-up in consumer activity, and the likelihood of the downturn in GDP for Q2 being a little less severe than previously envisaged, they are surely extrapolating as optimistic view as possible from very thin data," Nigel Sillis, client portfolio manager at Cardano, said in an email.

    The CPI data show a "disinflationary trajectory and the risk is that by the time that the end of Q3 approaches we will be looking at an environment where deflation is apparent," he said.

    Also Thursday, Norway's central bank kept the country's policy rate unchanged at zero.

    And the Banco Central do Brasil on Wednesday lowered its interest rate to 2.25% from 3%, amid the coronavirus pandemic.

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