The Bank of England expanded its bond-buying program to counter the coronavirus slump, but kept some of its powder dry should the labour market worsen more than expected.

Policy makers led by Governor Andrew Bailey voted to boost quantitative easing by 100 billion pounds (US$125 billion), while holding the benchmark interest rate at a record-low 0.1 per cent. Chief Economist Andy Haldane favored keeping QE unchanged.

The decision, which was widely predicted, should keep the lid on government borrowing costs as the Treasury ramps up bond sales to finance a massive support package to save jobs and keep businesses afloat.

The central bank, however, surprised investors by saying it’ll slow its purchases because stress in financial markets has eased, while reserving the option to accelerate them up again if needed. Bonds fell, sending the yield on 30-year securities up 10 basis points, while the pound weakened more than one per cent.

Bailey said that while the overall output is holding up better than expected in May, there’s probably worse to come for employment. Jobless claims have risen sharply and the number of workers on the government’s furlough program is higher than the BOE had anticipated.

“We certainly do see signs of activity picking up,” Bailey said. But “we also have quite a strong focus on the labour market,” where the data are “quite mixed.”

The new pace of bond purchases means the total QE target of 745 billion pounds should be reached around the end of the year, and the bank didn’t indicate a possible extension into 2021.

What Bloomberg Economists’ Say...

“The tone of the minutes was more upbeat than we had expected on the near term outlook. In particular, the committee noted that the depth of the fall in output was likely to be less severe than it expected, while the recovery appeared to be taking root faster.” —Dan Hanson, senior U.K. economist.

In contrast, the European Central Bank this month almost doubled its own emergency bond-buying program and extended it until the middle of next year.

Nor did the BOE offer any hints on whether policy makers are considering additional policies such as negative rates. Money markets erased bets on the BOE taking borrowing costs below zero.

Bailey later told reporters in a phone briefing that the Monetary Policy Committee didn’t discuss negative rates or targeting specific bond yields — a policy known as yield curve control that is deployed by the Bank of Japan.

Before Thursday’s decision, economists and investors were predicting the central bank was likely to take more action later this year after economic output fell by 20 per cent in April alone and the risk of a no-deal Brexit increased.

“It’s interesting that there was no commentary in the minutes at all about negative interest rates,” said David Page, head of macroeconomics at AXA Investment Managers. “Markets had been looking for some light on them, or maybe just being referred to as a longer term consideration. The fact that there wasn’t anything was a surprise.”

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The U.K. is struggling to emerge from a virus lockdown that started later than much of Europe, with swathes of its services-dominated economy either just getting back to business or still shuttered. The OECD said the nation could see one of the developed world’s worst contractions in 2020, with output slumping more than 11 per cent — the most for more than 300 years.

A monthly survey by the Treasury published this week showed economists expect GDP to fall 9.1 per cent in 2020, followed by growth of 6.2 per cent in 2021. That’s a far less optimistic outlook than scenarios produced by both the government’s fiscal watchdog and the BOE, and would leave output 3.5 percentage points below 2019 levels by the end of next year.

Kallum Pickering, a senior economist at Berenberg, said the announcement “makes it unlikely” that the BOE would increase asset purchases for the rest of the year. “Prior to the meeting, we, along with many in the market, had expected the BoE to add a total of 200 billion pounds to its purchases in 2020,” he wrote in a report.