• By The Financial District


Updated: Aug 8, 2020

The Bank of England (BoE) has predicted that the economic downturn in the UK economy might be less severe than it thought at the start of the COVID-19 pandemic, Euronews reported.

British banks also have enough capital to keep lending to businesses and absorb the huge losses likely to result from the pandemic, the BoE said.

There is also confidence regarding the impact of Brexit on the UK's financial services once the transition period expires at the end of the year.

The central bank says that in the event of no deal being reached between the UK and the EU, most risks to stability "have been mitigated". But it adds that "some disruption is possible", "further action is needed" and the full impact cannot be anticipated.

The relatively upbeat assessments come in two reports published by the bank on Thursday.

The BoE warns, however, that it could take a longer time for the economy to return to its pre-covonavirus size -- and that amid high uncertainty the banking system might struggle in the face of "severe economic outcomes".

'Keep lending'

The central bank opened the door to providing more monetary stimulus as Britain reopens after the pandemic lockdowns. Its Financial Policy Committee (FPC) warned that defensive action like scaling back on lending would be costly to both banks and the wider economy.

"It remains the FPC’s judgement that banks have the capacity, and it is in the collective interest of the banking system, to continue to support businesses and households through this period," the committee said.

The BoE estimates that the economy probably shrank by 23% in the second quarter but is already recovering. Its prediction of a 9.5% overall contraction in the economy for 2020 was more optimistic than its forecast in May for a 14% drop.

However, it says the economy probably won’t return to pre-pandemic levels until the end of 2021 as spending by consumers and businesses remains weak.

Committee minutes show there is concern about rising rates of unemployment, which it's feared could prove to be more persistent than expected. The jobless rate is forecast to rise to 7.5% this year, from 3.75% in 2019.

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The Financial District®  2020