LONDON (Reuters) – Britain is enduring its deepest recession in centuries but the havoc wrought by the coronavirus pandemic will not be enough to push the Bank of England to adopt negative interest rates, a Reuters poll found.
The virus has infected just over 5 million people worldwide and killed more than 327,000. Britain has the highest COVID-19 related death toll in Europe despite a lockdown that has kept citizens at home and businesses closed since March 23.
That virtual halt in activity means the economy will contract 17.5% this quarter, the May 19-21 poll found, a much sharper contraction than the 13.1% predicted last month. In a worst-case scenario the economy will shrink 22.5% this quarter.
But the recovery will be stronger than previously thought and growth will soar to 11.9% next quarter assuming at least some lockdown measures are lifted.
“Daily data on motor vehicle journeys and energy consumption, alongside weekly data on retail sales, show that the economy hit rock-bottom in early April and has begun to recover in May,” said Samuel Tombs at Pantheon Macroeconomics.
Britain’s economy will contract 7.7% this year, according to the median of over 70 economists surveyed, then grow 5.2% in 2021.
Further clouding the near-term outlook, Britain’s transition period after leaving the European Union is due to expire at the end of December. Despite the coronavirus pandemic, Britain has said it will not ask for an extension.
Talks on a new pact to cover everything from trade to fisheries to security from 2021 have reached an impasse before a key deadline at the end of June, when Brussels and London are to assess their progress.
Economists were unanimous in saying the two sides would eventually agree a free trade deal, which Reuters polls since the June 2016 vote to quit the EU have consistently seen as the most likely outcome. But the latest survey suggested it will not include Britain’s dominant service industry.
“I do not think that either side is even thinking about services — they have enough trouble with the goods part,” said Peter Dixon at Commerzbank.
Reuters poll graphic on the United Kingdom economic outlook here
DON’T BE NEGATIVE
To support the economy, the BoE has slashed its main interest rate to a record-low 0.10% and reinvigorated its quantitative easing programme, expanding its firepower to around 645 billion pounds in March. The poll said another 80 billion pound increase would be announced on June 18.
Medians in the poll suggest rates will stay unchanged until at least 2022, although BoE Governor Andrew Bailey said on Wednesday he was less opposed to negative interest rates than before the coronavirus crisis escalated.
Other top policymakers have similarly left the door open, prompting investors to price in negative rates by the end of 2020.
But while the Bank of Japan and the European Central Bank have cut rates below 0% to deter banks from parking cash instead of lending it out, 20 of 23 respondents to an additional question said the BoE was unlikely to follow suit.
“Our main reason for scepticism that the MPC will take Bank Rate negative is that the primary instrument for responding to the crisis is QE, which we see as effective and expandable,” economists at Morgan Stanley told clients.
Reuters poll graphic on the chances the BoE's Bank Rate turning negative within a year here