The Bank of England (BoE) has predicted that the economic downturn in the UK economy might be less severe than it thought at the start of the COVID-19 pandemic.
British banks also have enough capital to keep lending to businesses and absorb the huge losses likely to result from the pandemic, the BoE said.
There is also confidence regarding the impact of Brexit on the UK’s financial services once the transition period expires at the end of the year.
The central bank says that in the event of no deal being reached between the UK and the EU, most risks to stability “have been mitigated”. But it adds that “some disruption is possible”, “further action is needed” and the full impact cannot be anticipated.
The relatively upbeat assessments come in two reports published by the bank on Thursday.
The BoE warns, however, that it could take a longer time for the economy to return to its pre-covonavirus size — and that amid high uncertainty the banking system might struggle in the face of “severe economic outcomes”.
The central bank opened the door to providing more monetary stimulus as Britain reopens after the pandemic lockdowns. Its Financial Policy Committee (FPC) warned that defensive action like scaling back on lending would be costly to both banks and the wider economy.
“It remains the FPC’s judgement that banks have the capacity, and it is in the collective interest of the banking system, to continue to support businesses and households through this period,” the committee said.
The BoE estimates that the economy probably shrank by 23% in the second quarter but is already recovering. Its prediction of a 9.5% overall contraction in the economy for 2020 was more optimistic than its forecast in May for a 14% drop.
However, it says the economy probably won’t return to pre-pandemic levels until the end of 2021 as spending by consumers and businesses remains weak.
Committee minutes show there is concern about rising rates of unemployment, which it’s feared could prove to be more persistent than expected. The jobless rate is forecast to rise to 7.5% this year, from 3.75% in 2019.
“The outlook for the UK and global economies remains unusually uncertain,” the bank said in a statement. “It will depend critically on the evolution of the pandemic, measures taken to protect public health, and how governments, households and businesses respond to these.”
“We’ve got huge uncertainty and a very big downside risk,” warned Bank of England Governor Andrew Bailey.
The BoE’s Monetary Policy Committee kept its benchmark interest rate at a record low of 0.1%.
Some analysts were surprised by the central bank’s assessments.
“The Bank of England’s overly optimistic updated economic projections leave the door wide open for more monetary stimulus later this year,'” wrote Kallum Pickering, senior economist at Berenberg bank, in a note that began with the headline “Verging on unrealistic”.
“Relative to the obvious challenges ahead linked to the COVID-19 pandemic, highlighted by the recent re-imposition of modest containment measures in major parts of the UK, the V-shaped recovery that the Bank of England continues to project seems unlikely, to put it mildly.”