On May 6^th, 2020, in recognition of the impact of Covid-19 on the economy (Household consumption has fallen by around 30% as consumer confidence has declined. Companies' sales are expected to be around 45% lower than normal and business investment 50% lower) the Bank of England left its benchmark Bank Rate at 0.1%. The bank also decided not to launch a new stimulus programme but rather continue with the purchase of 200 billion worth of government and sterling non-financial investment grade corporate bonds.

The Bank of England forecast that GDP could shrink by 14% in 2020 but rebound with a 'V'-shaped recovery. However, the forecasts by the Bank of England have been critiqued as being too optimistic. Economists questioned the BoE's forecast that after the worst recession in 300 years in 2020, the economy would bounce back strongly by 2021 without sustaining any significant and persistent damage. At issue was the speed of the upturn predicted by the BoE with all of the contraction eliminated in the second half of 2021 and unemployment dropping from 9 per cent in 2020 to below 4 per cent by 2023 that economists thought was too optimistic.

Kallum Pickering, economist at Berenberg, said the BoE forecast was "probably too optimistic", partly because it assumed a smooth path to a trade deal with the EU and also because of what he expects to be "excess precautionary saving" by households.

Question 2 continued:

2.1 How can the Bank of England use monetary policy to boost the economy?

(13 marks)

2.2 The article notes that Bank of England's forecast been criticised as "being too optimistic?". Discuss, providing two reasons, as to why the forecast may be too optimistic.

(12 marks)