The UK economy could be back to pre-Covid levels within a few months, according to Bank of England Governor Andrew Bailey.
Growing signs that the vaccination programme is going to be a success – and crucial slow the new variants of Covid-19 – have led Britain’s top banker to speculate that the economy could bounce back sooner rather than later.
He said improvements could start in the second quarter of the year as more than a year of restrictions start coming to an end, and shoppers start regaining the confidence to spend.
But the Bank also warned the third national lockdown in England will send gross domestic product (GDP) – a measure of the size of the economy – tumbling by more than 4 per cent at the start of this year.
This saw the Bank slash its overall growth forecast for this year to 5 per cent from 7.25 per cent, but hike its prediction for next year from 6.25 per cent to 7.25 per cent.
The Bank decided to keep its base rate at 0.1 per cent today, telling banks to be ready in case of a future cut.
If that did happen – and the Bank stressed it might not – it could pave the way for some banks to charge fees to savers. But forecasts made alongside the rates decision showed the Bank believes the UK will narrowly avoid a double-dip recession, as defined by two successive quarters of falling output.
Mr Bailey said: “The MPC’s central forecast assumes that Covid-related restrictions and people’s health concerns weigh on activity in the near term, but that the vaccination programme leads to those easing, such that GDP is projected to recover strongly from the second quarter of 2021, towards pre-Covid levels.”
He said the progress of the vaccine programme was “very good news”.
He said: “I want to congratulate and pay tribute to everybody who’s involved – it’s a great story and it is reflected in our forecast.”
As well as keeping rates at 0.1 per cent the Bank’s Monetary Policy Committee (MPC) voted to its quantitative easing programme unchanged at £895 billion.
In a highly anticipated update on its consultation into the feasibility of below-zero rates in the UK, the Bank also revealed it believed it was “appropriate” to begin preparations for adding negative rates to its toolkit in six months’ time.
It has told lenders to get their systems ready, but stressed negative rates are not imminent and that this is no signal that such a move would be made in the future.
While first-quarter 2021 GDP is set to fall, it is now predicting the economy expanded by 0.6 per cent at the end of 2020 as the UK proved surprisingly resilient in the November lockdown.
This will still leave GDP 10 per cent lower year-on-year in 2020, while unemployment will peak at 7.8 per cent after the furlough scheme ends, according to the Bank.
But it is forecasting that as restrictions ease, household spending will surge with Britons splashing out 5 per cent of their savings built up during lockdowns.
It said there was evidence from business sectors that vaccine news had already seen UK holiday bookings jump for later in 2021, though caution remains over overseas trips.
“The Covid vaccination programme would be expected to lead to an easing of social distancing restrictions, reduced economic uncertainty, and higher activity, although the timing of those effects is hard to predict,” the Bank said.
Howard Archer, at the EY Item Club, said the Bank kept rates on hold as it “chose to look to the brighter longer-term prospects for the economy which will stem from the progressive rollout of the Covid-19 vaccines”.