The Bank of England said Britain’s economy will grow this year at its fastest rate since the Second World War while announcing it has slowed the pace of its bond-purchasing program, but it is stressing it is not reversing its stimulus.
Governor Andrew Bailey welcomed the prospect of a stronger recovery than previously forecast as the country races ahead with its coronavirus vaccinations and with much lower unemployment.
But he also said there was still a big gap compared with how big the economy would have been without the pandemic.
“Let’s not get carried away,” Mr. Bailey said about the improved outlook. “It takes us back by the end of this year to the level of output that we had essentially at the end of 2019 pre-COVID.”
The BoE raised its forecast for British economic growth in 2021 to 7.25 per cent from February’s estimate of 5.0 per cent.
That would be the fastest annual growth since 1941 when Britain was rearming. But it comes after output plunged by 9.8 per cent in 2020, the biggest drop in more than 300 years.
As well as the vaccines, the growth upgrade reflected a smaller-than-feared hit from a third coronavirus lockdown, which began in January and the extension of higher public spending and tax cuts announced by Chancellor of the Exchequer Rishi Sunak in March.
The economy was set to return to its prepandemic size in the fourth quarter of 2021, three months earlier than previously thought, the BoE said. But it lowered its projection for growth in 2022 to 5.75 per cent from its previous estimate of 7.25 per cent.
With the economy on course for recovery, the BoE said it would reduce the amount of bonds it buys each week to £3.4-billion ($5.8-billion), down from £4.4-billion now.
“This operational decision should not be interpreted as a change in the stance of monetary policy,” it said.
So far most central banks in rich countries have stressed they are in no hurry to scale back their huge economic support. But the Bank of Canada said last month it could start to raise rates by late 2022 and pared back its bond-buying.
“While the Bank of England is clearly more positive about the U.K. economy in the near-term, the Monetary Policy Committee also has significant uncertainties about the longer-term outlook and are seemingly in no hurry to tighten monetary policy,” Howard Archer, an economist with forecasters EY Item Club, said.
The central bank kept its benchmark interest rate at a record low of 0.1 per cent and the total size of its bond-buying program unchanged at £895-billion, as expected by economists polled by Reuters.
BoE chief economist Andy Haldane, who has warned of inflation risks, cast a lone vote to cut the bond-buying scheme by £50-billion. Mr. Haldane is scheduled to leave the bank in June.
The BoE said it now expected unemployment to rise only slightly to a peak of 5.4 per cent in the third quarter of 2021, when Mr. Sunak’s jobs protection program is due to expire.
As a result, and an expected short-term boost to investment from government tax incentives, the central bank lowered its estimate of long-term economic scarring to 1.25 per cent from 1.75 per cent.
The BoE said inflation was likely to slightly overshoot its 2-per-cent target later this year owing to temporary factors mostly related to energy prices. But it is keeping a closer eye on whether there could be longer-term supply bottlenecks following the pandemic and Brexit.
The BoE is predicting inflation fractionally below its 2-per-cent target in two to three years, based on expectations in financial markets for Bank Rate of 0.3 per cent in two years and 0.6 per cent by the second quarter of 2024.
Mr. Bailey said the BoE was not sending a signal about the likely path of interest rates.
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