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Chief economist update: COVID with a vengeance

Brexit is over.

But even before the UK and the EU shook hands on the post-Brexit trade and cooperation pact on 24 December 2020 and before the ink on the signatures of European Commission President Ursula von der Leyen, European Council President Charles Michel and UK Prime Minister Boris Johnson on 30 December 2020 has dried, Britain's already battling a fresh outbreak of coronavirus infections.

The third wave is much worse. data show daily new cases of infections have reached 60,000 persons as at 4 January 2021 - almost double the 33,500 peak in the second wave and exponentially more than 7900 top in the first.

So far, the British currency's reaction has been relatively muted. Sterling's effective exchange rate has depreciated by 2.5% in 2020 -because central banks around the world have been responding almost in unison (through increased policy accommodation), leaving no single central bank at a relative advantage - a zero sum game if you will.

It's a different story for the stock market. The FTSE-100 index underperformed its peers, dropping by 14.3% in 2020. This compares with gains of 16.3% and 16.0% in the S&P 500 and the Nikkei-225 index, respectively and the Euro Stoxx-50's 5.1% loss over the year.

Whether or not the FTSE-100 rebounds or sinks deeper this year depends on how quickly the government gets on top of the fresh outbreak and re-imposed lockdowns eased.

Prime Minister Johnson announced a national lockdown starting on January 4 that is expected to stay in place until the middle of February this year. But as Cabinet minister Michael Gove warned: "We can't predict with certainty that we will be able to lift restrictions in the week commencing February 15 to 22."

This risks of another recession in the UK so soon after the economy's 16.0% recovery in the September quarter, following GDP contractions of 3.0% in the first quarter of 2020 and 18.8% in the second.

To mitigate the fallout, Chancellor Rishi Sunak announced a fresh £4.6 billion (US$8.2 billion) in emergency funds to support retail shops, restaurants and tourism businesses from the re-enforced lockdown.

The fiscal stimulus gives the Bank of England (BOE) some breathing room to assess the recent developments before its scheduled meeting on the February 4.

At its December 2020 meeting, the UK central bank voted unanimously to maintain Bank Rate at a record low of 0.1% and the size of its bond-buying program at £875 billion.

Then again, at the time, it expected that: "The successful rollout of vaccines should support the gradual removal of restrictions and rebound in activity that was assumed in the November Report..."

As we know now, restrictions have been even more tightened. Negative interest rates next?

Read our full COVID-19 news coverage and analysis here.

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