Bank of England boss Andrew Bailey has said the UK’s vaccination programme will help the economy bounce back sharply later this year towards levels seen before the crisis.
The Bank’s governor said the rapid rollout of the programme would help the economy recover from the start of the summer as it allows restrictions to be lifted and gives Britons more confidence to spend.
But it comes as the Bank 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% at the start of this year.
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 programme was “very good news”.
“I want to congratulate and pay tribute to everybody who’s involved – it’s a great story and it is reflected in our forecast,” he said.
His comments came after the Monetary Policy Committee (MPC) voted to keep rates on hold at 0.1% and keep the Bank’s 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.
Forecasts made alongside the rates decision also showed the Bank believes the UK will narrowly avoid a double-dip recession, as defined by two successive quarters of falling output.
While first-quarter 2021 GDP is set to fall, it is now predicting the economy expanded by 0.6% at the end of 2020 as the UK proved surprisingly resilient in the November lockdown.
This will still leave GDP 10% lower year-on-year in 2020, while unemployment will peak at 7.8% 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% 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”.