Businesses welcome extra QE for UK economy

The Bank of England is to pump another £100 billion in its latest bid to boost the UK economy in the face of the coronavirus pandemic.

Union Jack, coronavirus image, plus financial markets image

David Sapsted

18 June 2020

Despite signs that the Covid-19 drag on the economy might be less than feared a month ago, the bank's Monetary Policy Committee (MPC) has voted eight to one to expand its quantitative easing programme to £745 billion.The MPC also voted to hold interest rates at 0.1% despite speculation among economists that a cut to zero could be in the offing.

Bank of England MPC statement

In a statement on Thursday, the bank said, "There are signs of consumer spending and services output picking up, following the easing of Covid-related restrictions on economic activity. Recent additional announcements of easier monetary and fiscal policy will help to support the recovery."Downside risks to the global outlook remain, however, including from the spread of Covid-19 within emerging market economies and from a return to a higher rate of infection in advanced economies."The emerging evidence suggests that the fall in global and UK GDP in 2020 Q2 will be less severe than set out in the May Report. Although stronger than expected, it is difficult to make a clear inference from that about the recovery thereafter."There is a risk of higher and more persistent unemployment in the United Kingdom. Even with the relaxation of some Covid-related restrictions on economic activity, a degree of precautionary behaviour by households and businesses is likely to persist."The economy, and especially the labour market, will therefore take some time to recover towards its previous path."The additional QE will see the bank buy government bonds from investors, enabling additional funds to be pumped into the economy.

British Chambers of Commerce comment on the latest announcement of additional quantitative easing

Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said the bank's decision to expand QE reflected the unprecedented impact of coronavirus on the UK economy."It is vital that the Bank works with financial institutions to ensure that it translates into on the ground support for businesses," he added.“With economic conditions likely to remain challenging in the near term, further easing remains likely. However, with interest rates already at an historical low, extra loosening of monetary policy is unlikely to provide a significant boost to the economy."The central bank has rightly decided against moving interest rates into the negative, which risks doing more harm than good.“The focus instead should be on delivering a fiscal environment that limits economic scarring and helps kickstart a recovery. This should include taking steps to close the remaining gaps in government support, including giving businesses with direct incentives to invest and hire, and stimulating consumer demand through a temporary, but significant cut in VAT.”

Capital Economics: figures suggest that "more QE will be needed eventually"

Thomas Pugh, UK economist at Capital Economics, pointed out that the extra QE came on top of £200 billion announced in mid-March."And as the MPC said it expects to complete these extra purchases around the turn of the year, that implies a much slower rate of purchases of about £4 billion a week, down from the recent rate of about £13.5 billion," he added."This implies that the bank thinks it has done enough for now. Our view that inflation will still be closer to 1% by the end of 2020 than the bank’s 2% target, suggests more QE will be needed eventually."

Rumours of negative UK interest rates

Dean Turner, economist at UBS Global Wealth Management, says speculation around a zero interest rates will not go away and points to the negative rates adopted by the Swiss National Bank."As expected, the bank has kept interest rates unchanged at today’s meeting. However, speculation of changes to the base rate, with the potential of negative rates, refuses to go away - this genie is going to be very hard to get back into the bottle now that it has been released," he said."At this stage, we don’t believe the bank will take rates lower this summer, let alone into negative territory. We may, however, see some evolution in the funding schemes for banks, to support lending to the economy."This could raise a few eyebrows, but has the potential to be more successful in increasing the flow of credit than cutting base rates alone."We continue to see concerns around the potential for negative interest rates, and more recently Brexit, as overdone. We expect the pound to strengthen against the weakening dollar as the year progresses."