The Bank of England is set to hike its forecasts for the UK economy on Thursday as the vaccination programme and easing of lockdown help to boost Britain’s recovery.
Policymakers at the Bank are expected to “significantly” upgrade their growth outlook as they keep interest rates on hold at 0.1%, according to experts.
While the latest lockdown is predicted to see gross domestic product (GDP) – a key measure of the economy – fall once more between January and March, it is thought the hit will be far less than first feared as the economy becomes increasingly resilient.
GDP rose 0.4% in February, after a 2.2% fall in January, even though England was still in full lockdown.
Economists also believe the economy has already got off to a strong start in the second quarter as non-essential shops and outdoor dining reopened on April 12.
Banking giant Barclays predicted on Friday the UK economy would grow by 6.5% this year – the best year of growth since records began in 1948.
Whereas all eyes were on the possibility of negative interest rates last year, attentions have now turned to when the Bank’s Monetary Policy Committee (MPC) may look to lift them amid concerns over rising inflation.
Some experts have said the Bank may even look to signal plans to scale back its mammoth £895 billion quantitative easing (QE) programme at this month’s meeting.
Howard Archer, chief economic adviser to the EY Item Club, said: “It looks highly likely that the Bank of England will revise significantly up its GDP growth forecast for the UK economy in 2021, although it may party offset this by lowering expected growth in 2022, and also markedly its unemployment projections.”
Recent official figures showed the UK’s rate of unemployment unexpectedly fell to 4.9% between December and February, while companies are beginning to hire again as the economy opens up.
“While it still looks likely that some jobs will be lost when the furlough scheme ends in September, it also looks like the peak in the unemployment rate will be less than the Bank of England previously feared,” Mr Archer said.
The Bank predicted in February that GDP would grow by 5% this year, and 7.25% in 2022 after GDP plunged 9.8% in 2020.
It predicted unemployment would peak at 7.8% after the furlough ends, but the scheme was subsequently extended at the Budget in March.
The EY Item Club believes growth could surge to 6.8% in 2021 and has also slashed its forecast for peak unemployment to 5.8%.
Inflation nearly doubled to 0.7% in March from 0.4% in February, but Mr Archer is not expecting rates or QE to change in 2021 and said inflation would need to be sustained at the 2% target before it considers tightening monetary policy.
“There is a growing possibility that the Bank of England could tighten monetary policy in 2022, although at the moment, early 2023 is more likely,” he said.
Investec economists are expecting some scaling back of QE from next May, with a rate hike not due until 2023.
But they caution: “The MPC’s path to monetary tightening will depend crucially on how the economy will perform once the Government’s extensive support measures are withdrawn, which will have an important bearing on the inflation outlook.
“Naturally, given the unprecedented nature and scale of the interventions, the uncertainty about this is high.”
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