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

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

The BoE added that its huge cash stimulus programme used to prop up the British 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 forced the UK into lockdown.

Britain's economy was expected to contract by 9.5 percent this year, the BoE said Thursday, 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."

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

The British pound shot higher Thursday after the Bank of England upgraded its economic forecast
The British pound shot higher Thursday after the Bank of England upgraded its economic forecast AFP / Justin TALLIS

The BoE on Thursday 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.

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.