COVID-19: BoE warns tougher restrictions to weigh on recovery

·3-min read

The Bank of England has warned tougher COVID-19 restrictions could weigh on the UK's recovery.

Minutes of the year's last monetary policy committee meeting, which resulted in a unanimous vote to maintain interest rates at their crisis low of 0.1%, showed concern that post-lockdown measures would inflict greater damage than the Bank had feared in November.

Those forecasts - released last month as the Bank bolstered its bond-buying stimulus - predicted a peak jobless rate of 7.75% by the second quarter of next year.

It envisaged that a plunge of up to 11% in gross domestic product (GDP) during 2020 would be capped off by a lockdown-enforced dip in the current final quarter.

However, the Bank's expectation was that it would be followed by growth of 2.1% in the first quarter of 2021, averting a double-dip recession.

It said that while vaccine developments were "likely to reduce the downside risks to the economic outlook", it added that "recent global activity has been affected by the increase in COVID cases and associated reimposition of restrictions."

The update came as the government announced that more swathes of England are to enter the toughest Tier 3 curbs in the coming days.

The Bank of England, which has also expressed fears of a potential Brexit hit early next year, kept its powder dry in policy terms as the country awaits clarification on how the UK will be trading with the European Union from 1 January as the transition period ends.

A section of the summary of its meeting read: "The outlook for the economy remains unusually uncertain.

"It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom.

"It will also depend on the responses of households, businesses and financial markets to these developments."

The Bank said it was prepared to tolerate inflation - currently at 0.3% - above its 2% target if a no-deal Brexit outcome caused the pound to plunge in value.

It is trading at its highest level against the US dollar in two-and-a-half years currently, at $1.36, on renewed hopes a free trade agreement will be struck in Brussels.

The Bank said: "Compared with previous periods during which non-negotiated Brexit outcomes had been possible, the economy was starting from a weaker position with greater spare capacity, increasing the committee's tolerance for a temporary overshoot in inflation."

Hinesh Patel, portfolio manager at Quilter Investors, said of the MPC's final scheduled meeting of the year: "Just as the Federal Reserve awaits news of a stimulus package, the Bank of England is stuck waiting for the Brexit negotiations to be resolved and as such have chosen to keep further stimulus on hold.

"It appears the BoE are paralysed to the outcome of a Brexit deal but still are still conscious as they seek to adapt where they can."