Britain's economic recovery faltering, Bank of England to step up spending

By Jonathan Cable

LONDON (Reuters) - The Bank of England is likely to supplement its quantitative easing war chest next month to offer more support to an economy still struggling amid coronavirus restrictions on activity and fears of a no-deal Brexit, a Reuters poll found.

Surging coronavirus infection numbers have pushed the government to tighten curbs across swathes of the country to try to stop the spread. More areas face tougher lockdowns in coming days.

A national lockdown earlier this year that forced businesses to close and citizens to stay home meant the UK economy contracted an historic 19.8% in the second quarter.

While the Oct. 13-19 poll predicted 16.7% growth last quarter, the outlook has darkened. The economy is expected to expand 2.6% this quarter and 1.0% next - weaker than the respective 3.4% and 1.3% median forecasts given last month.

For all of 2020, the economy will contract 10.1% but expand 6.1% next year, according to the poll of 78 economists, compared with the respective -10.0% and +6.1% forecasts given last month.

"The resurgence of COVID-19 across the UK and the resulting restrictions mean the recovery is set to stall. It now looks fairly inevitable that the Monetary Policy Committee will top-up its asset purchase programme," said James Smith at ING.

With Bank Rate already at a record low of 0.10%, and 59 of 64 economists who responded to an extra question saying the MPC would not take it below zero, the focus will be on bond buying, or quantitative easing.

Having added 300 billion pounds to the programme earlier this year, taking its total projected spend on gilts to 725 billion pounds, the median forecast in the poll was for a 100 billion pound top-up on Nov. 5.

"That would give policymakers scope to continue making purchases until early summer next year if the pace of purchases stays broadly similar," ING's Smith said.

Bank Rate was not expected to move until 2023 at least and only two of the 68 economists polled expected any change next month.

KEEP TALKING?

London said on Monday the door was still open if the European Union wanted to make some small concessions to save Brexit trade talks but unless the bloc budged there would be a no-deal exit in 10 weeks.

Britain's informal EU membership - known as the transition period - ends on Dec. 31.

"Enough progress has been made to keep the talks alive so that negotiators return to the table and a deal will eventually be done and be in place by the end of the year," said Liz Martins at HSBC.

The latest Reuters poll gave a median 40% chance no deal is made, unchanged from last month, and as in all Reuters polls since the June 2016 decision to leave the bloc, it said the most likely outcome was still some form of free trade agreement.

"It remains in everyone's interest to avoid a no-deal outcome," said Peter Dixon at Commerzbank.

"The economic headwinds posed by COVID-19 will exacerbate the costs of a no-deal Brexit, and the British government would be wise to do whatever is necessary to avoid it."

(Reporting by Jonathan Cable; polling by Sarmista Sen and Swathi Nair; Editing by Hugh Lawson)

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