The Bank of England is releasing more stimulus money to dampen the effects of the UK economy contraction, the largest monthly record in history.
UK central bank, the Bank of England, said it would increase its bond-buying program by another £100 billion to £745 billion as an effort to soften the blow of the economic downturn. It expects to reach its target by the end of the year.
Worst economic contraction
After spending a whole month in coronavirus lockdown, the UK economy shrunk by 20.4% in April, the largest monthly contraction ever recorded by the country.
According to the Office of National Statistics (ONS), the historic 20.4% contraction by the UK economy affected virtually all areas of economic activity. The decline is three times bigger than the contraction observed during the 2008 to 2009 economic crisis.
However, analysts say that this would likely be the worst month for the UK as the government started to ease on the lockdown in May. The ONS also published figures for the months of February to April, indicating a decrease of 10.4% compared with the previous three-month period.
British Prime Minister Boris Johnson said he was “not surprised” by the numbers and argued: “We’ve always been in no doubt this was going to be a very serious public health crisis but also have big, big economic knock-on effects.”
“The UK is heavily dependent on services, we’re a dynamic creative economy, we depend so much on human contact. We have been very badly hit by this,” the prime minister added.
The pandemic, economic downturn, and signs of recovery
The Bank of England’s latest move adds to the trillions of dollars in stimulus pledged by central banks globally as governments try to address the economic impacts of global recession, falling inflation and extreme unemployment stemming from the pandemic.
The UK central bank’s purchases of government bonds are financing recovery efforts as it borrows record amounts.
According to the Bank of England, there are signs that the easing of restrictions is helping boost consumer spending. While the central bank held its key interest rate at 0.1%, inflation fell back to 0.5% in May.
It warned that it's difficult to determine the strength of the expected recovery in the second half of the year.
The Bank of England said: "Even with the relaxation of some Covid-related restrictions on economic activity, a degree of precautionary behavior by households and businesses is likely to persist."
"The economy, and especially the labor market, will therefore take some time to recover towards its previous path," it added.
The Organization for Economic Cooperation and Development forecasts that the UK economy will contract by 11.5% this year even if a basic free trade agreement with the European Union is established and a second wave of infections is avoided.
With the recovery forecast to take years, the Bank of England may need to take more action, including the option of pushing interest rates into negative territory, a controversial measure already being done by the European Central Bank and Bank of Japan.
James Smith, developed markets economist at ING, explained: "The need to continue supporting the economy will undoubtedly fuel further discussion about whether negative rates are on the horizon."
