LONDON (AP) — The Bank of England opted against another monetary stimulus on Thursday amid rising optimism over the British economy’s prospects later this year in the wake of the rapid rollout of coronavirus vaccines.
Though the British economy is shrinking because the U.K. is in lockdown as a result of a spike in virus infections, the central bank appears relatively upbeat about the outlook for the second half of the year partly because of the speed of the vaccination program.
In a statement accompanying its decision, the bank’s rate-setting Monetary Policy Committee said the economy is “projected to recover rapidly towards pre-COVID levels over 2021, as the vaccination programme is assumed to lead to an easing of COVID-related restrictions and people’s health concerns.”
There had been speculation that the central bank, which has been proactive through the pandemic, could reduce its main interest rate below zero for the first time in an attempt to get banks to lend more.
Instead, the nine-member panel voted unanimously to maintain the bank’s main interest rate at the record low of 0.1% and to keep the bond-buying program as is. Since March, the committee has backed a further 450 billion pounds ($615 billion) in asset purchases to keep market interest rates low.
Despite hopes surrounding vaccines, the bank expects the British economy to contract by a further 4% in the first quarter of 2021 as a result of the lockdown.
The scale of the contraction is far lower than the 20% or so decline the British economy endured in the second quarter last year during the first lockdown.
Governor Andrew Bailey said businesses have learned to adapt to lockdown conditions by bolstering their online oeprations.
“The economic effects of lockdowns have attenuated as time has gone on,” he said in a virtual press briefing.
If the British economy contracts in the first quarter as anticipated, it will be around 12% smaller than it was at the end of 2019, before the coronavirus started hurting economic activity.
Once the restrictions start to ease, first with the reopening of schools and then subsequently with all shops and pubs and restaurants, the bank expects a rapid pickup later this year. That would see the British economy grow 5% over the course of 2021 despite the first quarter fall. For 2022, the bank is pencilling in growth of 7.25%.
The bank said the outlook still remains “unusually uncertain,” largely because of unknown developments with the virus, such as the potential of new variants that could be resistant to existing vaccines.
As of Wednesday, more than 10 million people in the U.K. have received their first vaccine doses, nearly a fifth of the adult population. That’s far more than other countries in Europe and has spurred hopes that lockdown restrictions will be eased sooner.
Separately, Bailey said the recently agreed trade deal between the U.K. and the European Union was in line with the bank’s predictions and had not yet led to any revision in its projections for the British economy.
Businesses are facing difficulties related to the new economic arrangements with the EU. Though the trade deal, which came into force at the start of the year, means there are no tariffs on goods exported or quotas on the amount sold, businesses are facing additional costs related to more form-filling and customs checks.