The Bank of England intensified its response to the fallout from the coronavirus by expanding its bond-buying programme, taking another step in the uphill battle to lift the economy out of the worst recession in centuries.
Policymakers led by governor Andrew Bailey voted 8-1 to boost purchases by £100 billion (Dh459.5bn) while keeping the benchmark interest rate on hold at a record-low 0.1 per cent. Chief economist Andy Haldane dissented on the additional quantitative easing, favouring no change.
The decision will keep the lid on government borrowing costs even as the Treasury ramps up bond sales to finance a massive support package to save jobs and keep businesses afloat. Policymakers said the pace of purchases would slow from current levels, but could be increased again if needed.
The downturn this year appears to be less severe than policymakers expected in May. The bond purchases will be completed by the end of the year, the BOE said.
The pound pared declines following the announcement to trade 0.1 per cent weaker at $1.2537 as of 12:10pm London time (3:10pm UAE time).
While the move was widely anticipated, it's unlikely to mark the end of the BOE's efforts to counter the slump. With economic output plunging 20 per cent in April alone and the risk of a no-deal Brexit looming, many economists and investors expect another increase in asset purchases this year. Some are also predicting negative interest rates or a targeted policy of keeping bond yields in check.
The UK is struggling to emerge from a virus lockdown that started later than much of Europe, with swathes of its services-dominated economy either just getting back to business or still shuttered. The OECD said the nation could see one of the developed world's worst contractions in 2020, with output slumping more than 11 per cent – the most for more than 300 years.
A monthly survey by the Treasury also showed economists expect GDP to fall 9.1 per cent in 2020, followed by growth of 6.2 per cent in 2021. That's a far less optimistic outlook than scenarios produced by both the government's fiscal watchdog and the BOE, and would leave output 3.5 percentage points below 2019 levels by the end of next year.