The UK Unemployment Rate (%) line chart shows that unemployment is lagging but is likely to stay higher for longer

BoE and Sunak jointly support the UK Covid economy

The UK money and tax cavalry rode into town on Thursday to bolster the UK economy as England imposed its second coronavirus lockdown.

Before the financial markets opened, the Bank of England announced it would create an additional £ 150bn next year to buy government bonds, further expanding the quantitative easing program that will reach £ 895bn by the end of 2021 .

At lunchtime, Chancellor Rishi Sunak announced that the government’s vacation program, which pays up to 80 percent of wages, would be extended to March, which greatly increases the generosity of state aid packages for the winter.

The Chancellor’s move threw almost the entire winter management plan announced six weeks ago into the trash can.

Both BoE Governor Andrew Bailey and Mr. Sunak said the BoE and Treasury Department’s steps were “coordinated” but the Chancellor had not ordered the central bank to announce the bond purchase.

Mr. Sunak told the House of Commons that the announcements showed that “all economic and monetary institutions have their roles”.

“The governor and I are in constant communication as the situation evolves,” he said. “Our responses are carefully designed to be complementary and provide security and support.”

But the BoE had been blinded early Thursday by an apparent leak of its policy decision to The Sun newspaper, which central bank officials feared was from parts of the Treasury Department or number 10. Mr Bailey said the BoE would “look into” and Establish an internal investigation of the potential leak.

The governor insisted that the BoE had not agreed to increase government bond purchases by £ 150 billion to fund Mr Sunak’s plans, stating that it was not “in any way related to the QE level what the government will borrow ”.

However, the governor refused to answer questions about how the bank’s Monetary Policy Committee had decided £ 150bn was the right amount of QE and what the consequences would be if he had decided to print more or less money.

“We’re not making a counterfactual forecast,” he said, declining to reveal how much of a difference he believed the central bank’s QE program would make and what was included in the BoE staff’s “benchmark forecast” that was is presented to the MPC in support of its discussions.

The MPC minutes state that the decision to ease monetary policy was made taking into account “risk management considerations”. “Announcing further asset purchases should support the economy and help ensure that the inevitable short-term slowdown in activity is not compounded by tightening monetary conditions, which could slow inflation back on target,” agreed MPC members.

The UK CPI inflation (annual percentage change) line chart shows that next year inflation will be higher than previously thought

The committee said it would continue money printing and bond purchases at its current pace in 2021, but retained the flexibility to increase the pace if financial conditions “worsen significantly” or slow down if the economy performs strongly .

Allan Monks, UK economist at JPMorgan, said the BoE’s package was “huge” and reduced the need for the central bank to push interest rates – currently 0.1 percent – into negative territory in 2021.

“The size of the package will send a strong signal for that [the BoE] provides sufficient coverage to meet the government’s still enormous loan needs in the coming year, ”he added.

At the Treasury Department, Mr. Sunak wasted little time outlining a much more generous package of support than he himself offered over the weekend when the last lockdown was hastily announced.

His U-turn in the termination of the job retention program was welcomed, and the BoE said it would delay labor pains and reduce unemployment for longer.

The bank’s forecast still had unemployment spiked from its current 4.5 percent to 7.75 percent next summer after the vacation program ended, but it didn’t expect the double-dip recession it forecast to have any immediate impact on that Unemployment would have.

UK GDP line chart 4th Quarter 2019 = 100 shows the bank is now expecting a double dip recession

Dave Innes, director of economics at the Joseph Rowntree Foundation, said Sunak “rightly acknowledged that the health crisis and its economic impact are likely to continue into the next several months,” and the move to extend the vacation program would allow the company to do so Plan winter.

However, other economists criticized the government for keeping jobs that were likely never feasible in suspended animations. Len Shackleton, a research fellow at the Institute for Free Market Economic Affairs, said the chancellor had “kept a significant number of people in artificial employment.”

The BoE itself said that the labor market and other parts of the economy would be scarring from the ongoing effects of Covid-19, and estimated the economy would remain 1.75 percent smaller by the end of 2023 than the bank was before expected the pandemic hit.

Unemployment rates would be higher over the longer term, the bank’s monetary policy report said, as some people would find that their skills are no longer as relevant and longer-term scars would include weaker business investment and productivity growth.