Covid-19 recovery will be tough, warns Bank of England governor

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The governor of the Bank of England, Andrew Bailey, has warned that Britain’s recovery from its Covid-19 slump will be tougher than anticipated and signalled that a fresh wave of money creation will be needed to support the pandemic-battered economy.

Writing for the Guardian on a day that saw news that a third of Britain’s 32-million- strong workforce is now being paid by the government via its staff furlough or self-employed support schemes, Bailey made clear that Threadneedle Street was contemplating new moves to boost growth.

The governor indicated that the support was more likely to come in the form of quantitative easing – whereby the Bank buys government bonds from investors and creates money in the process – than by cutting official interest rates to below zero for the first time in its 326-year history.

Since the Covid-19 crisis began in March, the Bank has cut official borrowing costs to 0.1%, announced a £200bn expansion of QE, taken steps to ease the financial pressure on large companies and made it easier for banks to lend.

Bailey expressed caution, however, about going a step further and taking interest rates negative.

“We have signalled that we stand ready to do more within the framework of policies we have used to date. And, in view of the risks we face, it is of course right that we consider what further options, such as cutting interest rates into unprecedented territory, might be available in the future. But it is also important that we consider very carefully the issues that such choices would give rise to.”

Despite the support measures announced by both the Bank and the Treasury, official figures released today (Wednesday) showed that out of a total labour force of 32 million the government was paying the wages of 8.4 million employees and providing income support to a further 2.3 million self-employed people.

With Bailey noting that the unemployment rate had more than doubled to 10% and expressing doubts about whether the economy could bounce back quickly, financial markets would now be braced for the Bank’s nine-strong monetary policy committee to provide more stimulus when it meets next month. Action taken so far had helped keep borrowing costs for firms and the government down, which was needed to support the economy and hit the official 2% inflation target.

“No one can be sure exactly how the pandemic will unfold,” Bailey said. “There are reasons to believe that economic activity will return at a faster pace than in many past recessions, but this depends on how the measures continue to be eased, what degree of natural caution is shown by people, and how much longer-term damage is done to the economy.”

He added: “The risks are undoubtedly on the downside for a longer and harder recovery.”

The governor said the Bank was monitoring a wide range of data to provide an up to date picture of how the economy was doing. These include journeys by train, plane and car, high street footfall, internet searches for hotel and restaurant bookings, credit card payments and weekly surveys of businesses and consumers.

“We have seen some uptick in road travel since social distancing measures were eased earlier this month. Most other indicators remain at subdued levels – most likely because it is too soon to expect to see any meaningful impact. However, it is also possible that the pace at which activity recovers will be limited by continued caution among households and businesses even as official social distancing measures are relaxed.”

HMRC said a million employers were now taking advantage of its furlough scheme, under which the Treasury pays 80% of an employee’s wages up to a monthly maximum of £2,500. Claims between 20 April and 24 May amounted to £15bn, with a further £6.8b paid to the self-employed.

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