Despite the government’s efforts, the Bank of England predicts that unemployment will rise sharply in the next few months.

Its new Covid-19 scenario suggests the UK jobless rate could soon spike to 9% – up from 4% at present – even though the government is encouraging firms to furlough staff.

The BoE’s explains:

As activity has fallen, the number of people in work has dropped sharply. It is likely that the Government’s Coronavirus Job Retention Scheme (CJRS) has materially reduced the number of redundancies. Early data suggest that applications for furlough have been received from 800,000 companies covering over six million jobs.

The number of people furloughed might be a little lower, though, as some could have more than one furloughed job. While the CJRS has significantly limited job losses, the flow of new Universal Credit benefit claims and early indicators of redundancies suggest that unemployment has risen sharply over the past couple of months. The unemployment rate is expected to rise to 9% in Q2.

The Bank of England has forecast that the UK economy could shrink by 14% this year.

It has drawn up a new scenario, showing how the Covid-19 pandemic will hurt growth.

It predicts that GDP will contract by 25% in the current quarter — a really serious slump — before recovering later in the year.

The BoE explains:

The illustrative scenario incorporates a very sharp fall in UK GDP in 2020 H1 and a substantial increase in unemployment in addition to those workers who are furloughed currently. Given the assumed path for the relaxation of social distancing measures, the fall in GDP should be temporary and activity should pick up relatively rapidly.

Nonetheless, because a degree of precautionary behaviour by households and businesses is assumed to persist, the economy takes some time to recover towards its previous path. CPI inflation is expected to fall further below the 2% target during the second half of this year, largely reflecting the weakness of demand.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Some early breaking news: The Bank of England has voted to leave UK interest rates at their record lows, at its policy meeting today.

The BoE’s monetary policy committee voted 9-0 to hold borrowing cost at just 0.1%, where they were slashed back in March as the Covid-19 pandemic struck.

It is also maintaining its plan of buying another £200bn of government bonds to sooth the economy, although two committee members wanted to boost this quantitative easing stimulus package by another £100bn,

The BoE has also warned that the UK economy has taken a serious jolt since the pandemic struck, with sales falling sharply and employment rising.

The minutes of the meeting says:

The timeliest indicators of UK demand have generally stabilised at very low levels in recent weeks, after unprecedented falls during late March and early April. Payments data point to a reduction in the level of household consumption of around 30%.

Consumer confidence has declined markedly and housing market activity has practically ceased. According to the Bank’s Decision Maker Panel, companies’ sales are expected to be around 45% lower than normal in 2020 Q2 and business investment 50% lower.

There has been widespread take-up of the Coronavirus Job Retention Scheme. Nevertheless, sharp increases in benefit claims are consistent with a pronounced rise in the unemployment rate.

More to follow…. (it’s an unusually early start – we normally get these minutes at noon, but the BoE have brought them forward due to the lockdown).

Also coming up today

Halifax bank will publish their latest UK house price index, although the plunge in transactions since the lock-down may under

New US unemployment figures are expected to show that another three million Americans filed new claims for unemployment benefit last week, on top of the 30 million already filed.

The agenda

• 7am BST: Bank of England’s interest rate decision and inflation report released
• 8.30am BST: Halifax UK house price index for April
• 1.30pm BST: US initial jobless claims for last week