Britain's economic downturn fuelled by the coronavirus pandemic will be less severe than thought -- but the nation's surge in unemployment will delay any recovery, the Bank of England forecast Thursday.

The pound rallied on the update, which included news that the BoE held its main interest rate at a record-low 0.1 percent.

The BoE added that its cash stimulus programme used to prop up the economy before and during the coronavirus pandemic would remain at £745 billion ($967 billion, 813 billion euros).

The amount includes £300 billion added to its so-called quantitative easing programme since March when COVID-19 prompted a UK lockdown.

The economy was now expected to contract by 9.5 percent this year, the BoE said, altering its prior guidance of a 14-percent contraction.

"Nonetheless, the recovery in demand takes time as health concerns drag on activity," the BoE said in minutes of its latest regular meeting that took place Tuesday.

"GDP is not projected to exceed its level in 2019 Q4 until the end of 2021, in part reflecting persistently weaker supply capacity," it added.

The BoE estimated that UK gross domestic product would rebound in 2021 by nine percent, but down on an earlier forecast for output growth of 15 percent.

The Bank added that it "does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the (bank's) two percent inflation target sustainably".

BoE governor Andrew Bailey told a virtual press conference that negative interest rates were in the bank's "toolbox", but said there were no immediate plans to use the controversial measure.

"The Bank thoroughly bashed the idea of negative interest rates, at least in the next six months or so," noted Ruth Gregory, senior UK economist at Capital Economics research group.

The British pound shot up on Thursday
The British pound shot higher Thursday after the Bank of England upgraded its economic forecast. Photo: AFP / Justin TALLIS

"It suggested that while negative rates can work in some circumstances, it would be 'less effective as a tool to stimulate the economy' at this time when banks are worried about future loan losses."

The BoE on Thursday also forecast that Britain's unemployment rate would shoot higher to around 7.5 percent by the end of the year.

"Employment appears to have fallen since the COVID-19 outbreak, although this has been very significantly mitigated by the extensive take-up of support from temporary government schemes," the minutes said.

"Surveys indicate that many workers have already returned to work from furlough, but considerable uncertainty remains about the prospects for employment after those support schemes unwind."

UK companies -- from major retailers to airlines -- are axing thousands of jobs despite government efforts to safeguard employment during the pandemic.

The state has been paying up to 80 percent of wages for almost ten million workers under its furlough scheme, which finance minister Rishi Sunak plans to end in October.

Replacing the scheme is a stimulus package worth ?30 billion, including bonuses for companies retaining furloughed staff and offering apprenticeships, amid fears of mass youth unemployment resulting from the virus fallout.

Britain's official unemployment rate stands at 3.9 percent, while annual inflation is at 0.6 percent.

Other recent official data showed Britain's economy tanked in the first quarter by 2.2 percent -- the biggest quarterly contraction for more than 40 years.

Economists expect there to have been a far sharper slump in the second quarter, or three months to June, placing Britain in a technical recession.

Confirmation is due Wednesday when the first official estimate on second-quarter output is published.

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