The Bank of England has warned that the U.K. economy could fall into its worst recession on record and could contract as much as 25% in the second quarter as the pandemic and lockdown measures have impacted businesses and workers. Bank governor Andrew Bailey said there would be no quick return to normality.

The impact of coronavirus meant the economy would shrink 14% this year, based on the lockdown being relaxed in June. Scenarios drawn up by the Bank to illustrate the economic impact said Covid-19 was “dramatically reducing jobs and incomes in the UK”.

Mr Andrew Bailey made clear that policy makers could expand monetary stimulus as soon as next month as the U.K. faces potentially the worst economic slump in Europe.

His pledge to “act as necessary” suggests bond buying could be expanded for as long as needed, creating a program without limits. Bailey said he makes no distinction between having a target for quantitative easing and an open-ended commitment, as the Federal Reserve and European Central Bank have effectively done.

Bailey said we could do more QE in June,  and we’re keeping all options open. He spoke after the BOE’s latest decision, which saw two of its nine policy makers vote to immediately increase QE by 100 billion pounds ($124 billion). The rest agreed that downside risks “might necessitate further monetary policy action.”

The Bank of England noted that the current target of 645 billion pounds will be hit by July, suggesting an increase at June’s meeting. We’ve still got quite a bit of road left on that program and we’ll keep going down that road. Bailey said in press conference.

With its main rate at 0.1%, and the BOE reluctant to go below zero, QE has become the main policy tool to help the economy. Under a scenaio published Thursday, the central bank said the economy could shrink 14% this year because of coronavirus restrictions. That would be the biggest contraction since 1706.

Bailey, who pledged “total and unwavering commitment” to safeguard the economy during the crisis, told reporters that the fact no action was taken this time doesn’t rule out a response soon.

The Bank’s analysis, published on Thursday, was based on the assumption that social distancing measures are gradually phased out between June and September.

Asked if rates could be cut below zero and the benchmark interest rate was left at a record-low 0.1% in a unanimous decision.Bailey said “I don’t want to say we’re nearer to negative rates, but we’re not ruling anything out.” Still, the central bank is “nowhere near” using that tool, he added.

The Bank of England assumes the U.K. economy recovers all its lost growth by late 2021. That’s relatively optimistic compared with the euro zone, where the ECB central scenario doesn’t see a return to pre-virus strength until well into 2022.

The pound rose on that projected rebound and the decision not to increase bond-buying right away. It was up 0.1% to $1.2365 at 12:04 p.m. U.K. time.

On Thursday, BOE policy makers also warned that if banks don’t help companies through the cashflow strains of the virus lockdowns, there’ll be huge damage to the economy, and to banks themselves. Restricting lending could lead to a cascade of insolvencies, higher unemployment and falling house prices, all of which would ripple back to the financial industry.

“Continued expansion of bank credit is essential if deeper and longer lasting damage to the economy is to be mitigated,” Bailey said. “It is in the collective interest of banks.”

Mr Bailey said he expected any permanent damage from the pandemic to be “relatively small”. The economy was likely to recover “much more rapidly than the pull back from the global financial crisis,” He added.

Bailey also praised the action by the government to support workers and businesses through wage subsidies, loans and grants. He said the success of these schemes and the Bank’s own stimulus meant there would be “limited scarring to the economy”.

“The furloughing scheme really does enable people to come back into the economy more quickly so it’s a much quicker recovery that we’ve seen in the past.” The government’s programs “are working,” Bailey thinks, but “there’s an uncertain exit path from the furlough scheme.”

Other European countries started to lift parts of the lockdown this week. In the U.K., the government is considering easing some of the more stringent measures, though the economy will likely continue to need support.

Average weekly earnings are expected to shrink by 2% this year, reflecting the fall in wages for furloughed workers.

The Bank said sharp increases in benefit claims were “consistent with a pronounced rise in the unemployment rate”, which is expected to climb above 9% this year, from the current rate of 4%.

Under the Bank’s scenario, inflation, as measured by the consumer prices index (CPI) falls to zero at the start of next year amid the sharp drop in energy prices.It is also expected to remain well below the Bank’s 2% target for the next two years.

The Bank’s latest Financial Stability Report said the Bank’s scenario was consistent with a 16% drop in house prices. Latest figures published by UK finance show one in seven mortgage holders has taken a payment holiday due to the coronavirus.

The Bank said the number of new mortgage deals on offer had halved in just over a month as banks focused on the deluge of payment holiday requests. This includes a huge contraction in deals for buyers with a deposit of less than 40% of the purchase price.

The Bank warns that this is not a typical forecast and that “many other scenarios are plausible”. But these numbers provide the sharpest analysis yet of the economic challenge of the virus and its pandemic.

Editor: Judy Smith        News source from BBC and Bloomberg