[Context] Since the outbreak of the pandemic in 2020, we have seen rapid monetary and fiscal policy responses. The Bank of England cut the policy interest rate to support business and consumer confidence; it released the counter-cyclical buffer in bank lending to further support the ability of banks to supply credit. The fiscal policy response was also decisive to contain and mitigate the adverse impacts from the pandemic. However, spending measures such as the furlough scheme and loans to small business mean that the government debt increased rapidly. In May 2020, the UK government debt-to-GDP ratio exceeded 100% for the first time since the 1960s (See Figure 1). The Office for Budget Responsibility (OBR) forecast a budget deficit of $373 billion in 2020/21 in their November 2020 Economic and Fiscal Outlook. This is equivalent to 18% of GDP, the highest level since 1944/45. The OBR also forecast a deficit equivalent to 16.7% of GDP if the second wave of infections is kept under control, and 21.7% of GDP if the lockdown is extended and vaccines are ineffective in keeping the pandemic in check. 2 CONTINUED Figure 1: The UK government debt to GDP ratio over time. 300% 250% 200% 150% 100.9% 100% 50% 0% 1920 1940 1960 1980 2000 2020 Source: Office for National Statistics & OBR Figure 2: The 10-year government bond yields (%) 12 Implied inflation expectations 2 0 Nominal -2 Real -4 1985 90 95 2000 05 10 15 20 Source: Bank of England