Bank of England says downturn less severe than first feared as it leaves interest rates unchanged

The Bank of England has said it expects the downturn in the UK economy to be less severe than first feared, but could take longer to recover than previously predicted.

It also said that the UK economy shrank by more than 20% in the first half of the year after being hammered by the coronavirus pandemic.

The bank improved its “indicative projection” for growth in the economy, forecasting that GDP will shrink by 9.5% this year, following Government action aimed at protecting the economy.

In May, the central bank had warned that GDP could slump by 14% this year.

However, it also warned that it does not expect the economy to jump back to pre-virus levels until “the end of 2021”.

It had previously said it thought GDP may recover to its pre-virus size by the second quarter of 2021.

The bank revealed its forecasts as it held interest rates at 0.1% after its nine-strong Monetary Policy Committee (MPC) voted unanimously.

The central bank also said it will maintain its current quantitative easing programme at £745 billion.

It also forecast that unemployment will jump, with the rate at 7.5% at the end of 2020, before gradually declining from the start of next year.

A consensus of analysts had said they expected rates to be held, while quantitative easing plans were also expected to remain unchanged.

Rates have already been slashed twice, from 0.75%, since mid-March as part of the Bank’s measures to try and keep the economy afloat.

The value of the pound picked up against the dollar after traders welcomed the decision to hold rates.

Fiona Cincotta, analyst at Gain Capital, said: “The Bank of England was considerably more upbeat about the recovery than had been expected.

“Upwardly revised growth forecasts, a more rapid recovery than initially feared and no tilting towards negative rates at this time has sent sterling surging towards 1.32 US dollars.”

Naeem Aslam, chief market analyst at Avatrade, said: "Bank of England has kept the interest rate unchanged as expected because they know that the Covid-19 situation is not as bad in the UK as it is in the US.

"The coronavirus infection curve is still relatively flat and the economic data does presents some hopes for a V-shape recovery.

"Although, we think that the V-shape recovery is out of reach given the fact that Brexit talks are going nowhere."