U.K.’s Brittle Recovery Keeps Door Open for More BOE Easing

(Bloomberg) -- The U.K.’s economic recovery from the coronavirus crisis is looking fragile, signaling that the Bank of England and government’s battles are far from over.

Monetary Policy Committee member Silvana Tenreyro said Wednesday that the rebound from the worst economic collapse in centuries will look like an “interrupted V” by hitting a ceiling before the end of the year.

Her remarks followed forecasts from the nation’s fiscal watchdog that unemployment is set to spike to 4 million, and data showing disappointing economic growth in May and inflation far below the BOE’s 2% target.

The string of sobering news appears to splash cold water on the relatively optimistic assessment by BOE Chief Economist Andy Haldane -- the only official to vote against more monetary stimulus at last month’s policy meeting -- that high-frequency data so far indicate a rapid bounceback.

The central bank has already slashed the benchmark interest rate to a record low 0.1% and increased quantitative easing since March. Economists expect another 50 billion pounds ($63 billion) of bond purchases by the end of the year.

“With the risks to the growth and inflation outlook tilted firmly to the downside, we expect the BOE to ease again,” said Bloomberg Economics’s Dan Hanson. “Our base case is that a move comes in November.”

Speaking in Parliament Wednesday, Prime Minister Boris Johnson said the government was doing all it could to protect jobs, but some losses were inevitable. Data Thursday is forecast to show a huge drop in employment.

“We cannot, I’m afraid, simply with a magic wand ensure that every single job that was being done before the crisis is retained after the crisis,” he said.

More economic uncertainty could pile up toward the end of the year, when government support programs for companies and workers during the pandemic are scheduled to be phased out, and Britain’s exit from the European Union is due, potentially without a trade deal.

”We’re fairly pessimistic on the unemployment front,” said James Rossiter, an economist at TD Securities who used to work at the BOE. “The recovery is going to take time, especially with such a hard form of Brexit coming.”

While bond purchases are currently the BOE’s preferred stimulus tool, helping soak up the government’s massive debt burden, the outlook may force the U.K. central bank to consider other measures.

Tenreyro said that while she doesn’t have a personal view on negative interest rates, the evidence from other countries is encouraging. She said it’s a “live” topic at the central bank, where it’s being reviewed.

Bets on the BOE loosening policy further have picked up recently, with sub-zero rates on the cards next fall. Interest-rate futures tied to three-month sterling Libor -- the rate banks can borrow from each other -- traded above 100 for the first time last week, hinting at negative rates by March 2022. A day earlier, the same rate fell below the BOE’s benchmark, a move that often precedes a rate cut.

U.K. two-year yields fell to a record low Tuesday, slipping below their Japanese peers, suggesting the economic pain is set to drag on and further easing will be necessary to avoid the deepest recession in 300 years.

Economic output increased just 1.8% in May, well below expectations, following a 20% drop the month before, the statistics office said Tuesday. A separate report showed inflation at 0.6% in June.

Tenreyro said she’s “ready to vote for further action as necessary to support the economy and ensure inflation returns to target.”

©2020 Bloomberg L.P.