The Bank of England (BoE) has predicted an economic rebound in the spring led by a successful vaccine rollout, after revealing it will be holding interest rates at 0.1%.
The news comes as the BoE predicts that GDP is expected to fall by around 4% in the first quarter of 2021 – against previous expectations of a rise in its last monetary report in November. This comes after a rise in Covid-19 cases due to the new variant travelling through the UK.
However, the policymakers said that they expect GDP 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.
The BoE added that projected activity is also supported by the “substantial fiscal and monetary policy actions” already announced. Further out, the pace of GDP growth is expected to slow as the boost from these factors fades. Spare capacity in the economy is expected to be eliminated as activity picks up during 2021.
As such the BoE said the UK economy could be expected to reach pre-pandemic levels of Q4 2019 by the first quarter of 2022.
The BoE added that the twelve-month CPI inflation rose from 0.3% in November to 0.6% in December. It said the weakness of recent outturns largely reflects the direct and indirect effects of Covid on the economy. CPI inflation is expected to rise quite sharply towards the 2% target in the spring, as the reduction in VAT for certain services comes to an end and given developments in energy prices.
In the MPC’s central projection, conditioned on the market path for interest rates, it added the CPI inflation is projected to be close to 2% over the second and third years of the forecast period.
In the latest monetary report the BoE said: “The outlook for the economy remains unusually uncertain. It depends on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments.
“The MPC will continue to monitor the situation closely. If the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit. The Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”