The Bank of England building in central London.
Getty ImagesThe Bank of England will try to assess on Thursday, amid conflicting signals, whether the U.K.’s economic recovery needs more of its monetary help.
Yet it should decide, according to most economists and market analysts, that now may not be the time to add anything to the significant package it decided back in March, and improved since then, to help the U.K. recover from the coronavirus pandemic’s devastating economic impact.
The U.K. inflation number published on Wednesday is an example of the mixed signals the monetary policy committee will have to interpret. Inflation fell to its lowest level in nearly five years, to an annual 0.2%, taking the Bank another step further from achieving its official 2% target.
But that was due in large part to temporary factors—such as a value-added tax cut, or a government program to subsidize the prices of restaurant meals—that won’t repeat in the coming months. And the number has to be compared with the BoE’s own projection of -0.3%, which also argues for staying put.
The U.K.’s central bank can afford another couple of months, until its November meeting, before it takes more drastic action. The U.K.’s recovery, just like the rest of the developed world, may prove stronger than expected this year than was predicted a few months ago. According to the Organization for Economic Cooperation and Development forecast released on Wednesday, U.K. gross domestic product would shrink by 10.1% this year—more than the eurozone’s, seen falling 7.9%.
The U.K. economy, on the other hand, would rebound strongly in 2021, (up 7.6%) than the eurozone (5.1%). That should bring the European and U.K. economies to the same level toward the end of the next year—roughly 3% below their 2019 GDP level—compared with what they were before the pandemic hit.
All signs point to a deterioration of the labor market in the months to come, because the job-support programs the U.K. government devised to protect workers in the last few months are coming to an end, the surge in consumption will flatten out, and beyond that, the U.K. will have to bear the serious economic consequence of its exit from the European Union.
Even then, another reason for the BoE to wait and see is that the U.K. government has yet to decide on what type of fiscal stimulus, if any, is needed to support the economy over the next year.
By November, the Bank may decide to increase its asset-buying program, taken so far to $745 billion to help fend off the Covid-19 impact. For now, it seems that the monetary policy committee’s long-lasting deliberation on another key measure—whether or not negative rates would be a good idea for the U.K. economy—is still going on. The Bank’s key rate now stands at a record low of 0.1%.
Before it moves further, the MPC will have to arbitrate between those of its members who argue, along with chief economist Andy Haldane, that the recovery is strong enough, and those who, like Michael Saunders, think it “quite likely” that additional stimulus will be needed. Maybe it will need another two months to do that.
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September 16, 2020 at 05:53PM
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Bank of England on Thursday Is Expected to Wait and See How Strong the Recovery Is - Barron's
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