Bank of England unleashes more stimulus as UK economy sinks

The Bank of England is throwing more money at the British economy as the country tries to stave off its worst downturn in more than 300 years.

The central bank said Thursday that it would increase its bond-buying program by another ￡100 billion ($125 billion), bringing the total up to ￡745 billion ($929 billion). The Bank of England said it will reach that target by the end of the year.

A closed tourist souvenir shop on Oxford Street in London, as the country is in lockdown to help curb the spread of the coronavirus, Wednesday, April 15, 2020. Experts in the UK have warned that the economy could shrink by up to 35% as a knock on effect of the lockdown. The highly contagious COVID-19 coronavirus has impacted on nations around the globe, many imposing self isolation and exercising social distancing when people move from their homes. (AP Photo/Frank Augstein)

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The move adds to the trillions of dollars in stimulus already pledged by central banks around the world as policymakers take unprecedented steps to tackle the global recession, falling inflation and extreme unemployment stemming from the pandemic. The Bank of England’s purchases of government bonds are helping the UK government to finance recovery efforts as it borrows record amounts.

The country is in particularly rough shape. It has one of the highest coronavirus death tolls in the world and an economy that is only very gradually emerging from lockdown. UK GDP contracted by more than 20% in April, a record, following a 6% decline in March.The Organization for Economic Cooperation and Development warned last week that the United Kingdom would suffer the worst downturn of any major economy this year.

There are some signs that consumer spending is picking up as restrictions ease, according to the Bank of England, which held its key interest rate at 0.1%. Yet inflation fell back to 0.5% in May, and the central bank warned that it’s difficult to determine the strength of the expected recovery in the second half of the year.

“Even with the relaxation of some Covid-related restrictions on economic activity, a degree of precautionary behavior by households and businesses is likely to persist,” the Bank of England said. “The economy, and especially the labor market, will therefore take some time to recover towards its previous path.”

British Airways Airbus A380 aircrafts are parked at the Chateauroux-Deols "Marcel Dassault" Airport (CHR) on May 22, 2020 in Deols, central France. - Many planes from several airlines are parked at Chateauroux-Deols airport until the end of the crisis caused by Covid-19, the new coronavirus.

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There’s another huge cloud hanging over the economy and its ability to recover: Britain has set itself a deadline of the end of the year toget a trade deal with the European Union, its single biggest export market. Little progress has been made in talks so far.

The OECD has forecast that the UK economy will shrink by 11.5% this year even if a basic free trade agreement with the bloc is reached and a second wave of infections is avoided.

With the recovery expected to take years, economists predict that more action from the Bank of England will be needed down the line. That’s sparked discussion about whether the central bank could opt to push interest rates into negative territory, a controversial measure already deployed by the European Central Bank and Bank of Japan.

“The need to continue supporting the economy will undoubtedly fuel further discussion about whether negative rates are on the horizon,” James Smith, developed markets economist at ING told clients Thursday.