By Geoffrey Smith
Investing.com -- The Bank of England became the second major central bank this week to inject fresh monetary stimulus into a weakening economy, increasing its bond-buying program by 150 billion pounds to 875 billion pounds.
However, it kept its key interest rate unchanged at 0.1%, despite having examined the possibility of cutting it to zero or even below in recent weeks.
The move is a response to the sharp slowdown in the U.K. economy coming from the second wave of the Covid-19 pandemic. The country recorded nearly 500 deaths - the most since May - and over 25,000 new cases of the coronavirus on Wednesday.
The Bank said it expects gross domestic product to contract again in the fourth quarter, having rebounded in the summer from the initial Covid-19 blow. It also expects GDP in the first quarter to be "materially lower" than it was in the quarter before the pandemic erupted.
"Since the Committee’s previous meeting, there has been a rapid rise in rates of Covid infection," the Bank said in a statement. "The U.K. Government and devolved administrations have responded by increasing the severity of Covid restrictions. All restrictions announced up to and including 31 October have been reflected in the Committee’s judgements."
The Bank said it expects a further steep rise in unemployment despite the extensive wage support measures laid out by the government. The jobless rate will peak at 7.5% next year before a recovery feeds through into the labor market, it added.
Simon French, chief economist with Panmure Gordon stockbrokers, said the Bank's assumption that GDP would return to its pre-pandemic level by early 2022 was "still too optimistic, in my view."
The pound rose by around a quarter of a cent on the news. By 2:08 AM ET (0708 GMT), it was at $1.2971, up from $1.2946 immediately before the decision.