The Bank of England building in central London, the UK. Picture: AFP/ADRIAN DENNIS
The Bank of England building in central London, the UK. Picture: AFP/ADRIAN DENNIS

London —  The Bank of England said Britain could be headed for its biggest economic slump in over 300 years due to the coronavirus lockdown and kept the door open on Thursday for more stimulus in June.

In what it called an “illustrative scenario” rather than a standard forecast, the BoE said Britain's economy might be on course to shrink by 25% in the three months to June and unemployment could more than double to 9% of the workforce.

In 2020 as a whole, output risked shrinking by 14% — the biggest plunge since a “Great Frost” in 1709 — despite the huge stimulus provided so far by the BoE's rock-bottom interest rates and mammoth bond-buying programme, as well as the government's £100bn emergency budget measures.

The central bank's scenario did, however, include a sharp economic bounce-back in 2021 with growth of 15% if lockdown restrictions are loosened over the coming months.

The BoE kept its benchmark interest rate at an all-time low of 0.1% and left its target for bond-buying, most of it British government debt, at £645bn.

Two of its nine policymakers — Michael Saunders and Jonathan Haskel — voted for a further £100bn of bond-buying firepower and governor Andrew Bailey said the BoE was ready to act again.

“There is clearly a commitment and a determination to take action should we need to do so,” Bailey told reporters. “I would really leave that strong message with you.”

Last week, the US Federal Reserve restated a pledge to keep interest rates low and offer trillions of dollars in credit as long as the economy needs it. The European Central Bank also kept the door open to further stimulus.

Analysts at Nomura said the BoE now held more government bonds as a share of national economic output than its US and European counterparts although it might chose to slow its pace of purchases later in 2020.

Striking a less gloomy tone than many economists, Bailey said the BoE expected “the recovery of the economy to happen over time, though much more rapidly than the pullback from the global financial crisis”.

After more than six weeks of lockdown, Prime Minister Boris Johnson is due to outline Britain's next steps on Sunday.

Officials have suggested a gradual move towards reopening businesses, while ministers say that firms operating outdoors might be able to find a way to function in the summer months.

The BoE estimated an extra two weeks of lockdown would cost about 1.25% of GDP in the short term and raise unemployment by 0.75 percentage points, though the longer-term effect would be near zero.

More QE in June?

Many economists expect the BoE to increase its asset purchase programme in June, before the extra £200bn it gave itself in March is exhausted by the furious pace at which it is buying British government debt.

Some forecasters doubt Britain will bounce back as quickly as the BoE assumes.

“We see this forecast as credible for 2020, but are less convinced by the 2021 recovery, where we take a more cautious view, implying weaker growth, lower inflation, wider deficits and more MPC action,” Morgan Stanley's Jacob Nell said.

The BoE said inflation was likely to fall below 1% in the next few months, half the BoE's target, but that recent figures suggested demand had stabilised, albeit at very low levels.

The BoE also said banks were in a much better position to support households and businesses than during the global financial crisis.

Sterling rose after the central bank's announcement, initially gaining as much as half a cent against the US dollar. British government bonds prices fell slightly.

The BoE acknowledged there were risks that its scenario could prove too optimistic because people might remain cautious about resuming their normal lives after the lockdown.

Workers might be worried about their jobs and companies might also be more risk averse, saving money rather than spending.

In Europe, Norway's central bank cut its key interest rate to zero, a record low, from 0.25% on Thursday in a surprise move aimed at protecting an economy reeling from the coronavirus crisis.

Norges Bank said the Nordic country's mainland economy, which excludes oil and gas output, is now expected to contract by 5.2% this year, down from a March forecast of 0.4% growth.

“We expect activity in the Norwegian economy to decline by about 5% in 2020, a decline of a magnitude that we have not seen since World War 2,” Governor Oeystein Olsen said after the central bank's third rate cut in less than two months.

Norges Bank, which most economists polled by Reuters had predicted would keep rates on hold, has rapidly cut the cost of borrowing from 1.5% and forecasts it is likely to stay at zero until the end of 2023.

The central bank, which said it now expects growth of 3.0% in 2021 compared with an earlier forecast of 1.3%, also said it will continue its recently introduced programme of extraordinary liquidity lending to banks until the end of August.