Economy to grow five percent as vaccines boost recovery

A “rapid” Covid recovery is likely as Britain's economic prospects are transformed by its record-breaking vaccination drive, Bank of England Governor Andrew Bailey has said.

The country's economy will suffer a 4pc in the current quarter as a third lockdown bites, the Bank said - a double-dip recession will be avoided after a smaller autumn hit than feared.

The boost means the economy will have returned to its pre-pandemic size by 2022

With more than 10m people vaccinated so far, Threadneedle Street expects the current restrictions to be lifted gradually from April and to be largely gone by the autumn, helping output to “recover rapidly towards pre-Covid levels over 2021”.

The boost means the economy will have returned to its pre-pandemic size by 2022, despite a weaker than expected start to this year after a highly infectious mutant strain took hold. This would be a remarkable bounce back after Covid triggered the biggest hit to GDP since at least the First World War.

The central bank lowered its growth forecast for 2021 as a whole to 5pc from November’s 7.25pc, but raised its forecast for 2022 to 7.25pc from 6.25pc.

An indication that extra interest rate cuts and additional quantitative easing will not be needed

Mr Bailey said: “It's the same recovery but it's in a more condensed period and that is reflecting the vaccination, so it is very good news and I congratulate and pay tribute to everybody who's involved in it. It's an excellent story and it is reflected for us in our forecast.”

The Governor added that the vaccination programme “assists very positively” with boosting confidence, and said that the recovery could be even stronger than expected due to “quite a pronounced build up in household saving”.

Savings surged by an estimated £170bn last year as locked-down families were forced to hoard their money, and it is hoped that some of this cash will be used for a spending spree when restrictions are finally lifted.

The Bank assumes some 5pc of the savings accrued during the pandemic could be spent.

At the same time the Bank expects inflation will quickly return from its sub-1pc level of recent months back towards the official target of 2pc, in an indication that extra interest rate cuts and additional quantitative easing will not be needed.

Threadneedle Street has given lenders six months to get ready for negative interest rates, but Mr Bailey stressed that these preparations do not mean they will be used. He added: “My message to markets is you really should not try to read the future behaviour of the monetary policy committee from the actions we’re taking on our toolbox."

Financial markets took the six-month delay before any such move and the optimistic tone of its forecasts as a positive signal, pushing the pound to its strongest level against the euro since May. The UK’s benchmark cost of borrowing for 10 years rose to its highest level since the outbreak last March.

The monetary policy committee agreed unanimously to keep interest rates at 0.1pc and hold its bond-buying programme steady at £895bn.

But rate-setters also dropped another hawkish hint with a review of its quantitative easing efforts which could herald a shift in their previous stance of not selling off gilts until interest rates had returned to at least 1.5pc. The Bank could be free to unwind its bond-buying programme at lower rate levels in future, giving it more space to act if inflation climbs.

Cathal Kennedy, UK economist at RBC, said: “Why else do the prep work if the thinking is not moving towards that scenario?”

The Bank expects initial disruption to trade in the wake of the Brexit deal to cut growth by 1pc in the current quarter due to the impact on exports and domestic supply chains. It assumes this effect will fade by July.

Bank economists estimate the deal will leave output around 3.25pc lower in the long run compared to the UK staying in the EU, with trade overall 10.5pc down.

Source: The Telegraph