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The Bank of England is to pump an extra £150bn into the economy as it warned the resurgence of Covid-19 would lead to a slower, bumpier recovery.

Tighter lockdown rules, including new restrictions in England, are expected to push the UK into another downturn.

With the economy expected to avoid a recession, it is believed that unemployment will sharply increase as furlough and other government schemes wind down. 

The economy is set to shrink by 2% in the final 3 months of 2020 before bouncing back at the start of 2021 with the assumption of restrictions easing.

Economic Effects

The Covid-19 pandemic triggered the sharpest economic contraction on record earlier this year as nationwide restrictions were brought in to try to contain the virus.

Shoppers helped the economy to bounce back over the summer, and the Bank said retail sales remained strong through:

– People starting chritsmas shopping early

– People purchasing household goods to adapt to a work from home lifestyle

However, it said the hospitality, leisure, and tourism sectors had “suffered from lockdown rules”.

Many diners had stopped going to restaurants after the end of the Eat Out to Help Out scheme. The Bank said more than a third of people still felt uncomfortable dining in.

Unemployment set to rise

Thousands of people have already lost their jobs amid the pandemic, despite various support packages, including an extended furlough scheme.

Redundancies have climbed to their highest level since 2009 in recent months.

The Bank expects unemployment to peak at 7.75% in the middle of next year, from 4.5% currently. This would be the highest rate since 2013.

This represents a deeper downturn, and slower recovery than predicted in August.

How does the Bank inject money into the economy?

The Bank of England is in charge of the UK’s money supply – how much money is in circulation in the economy.

That means it can create new money electronically and the Bank spends most of this money buying government bonds through a process known as quantitative easing (QE).

QE is sometimes described as “printing money” but in fact no new physical bank notes are created.

Government bonds are a type of investment where you lend money to the government. In return, it promises to pay back a certain sum of money in the future, as well as interest in the meantime.