By Laurie Laird
LONDON (MaceNews) – The Bank of England warned of lingering consumer caution and a rise in structural unemployment in the wake of the Covid crisis, even as recent economic data suggest that the UK economy has been less badly hit than feared.
“I do wonder whether a shock if this size will cause some change in the labor market … companies will improve productivity at the cost of higher unemployment,” said Bank of England Governor Andrew Bailey. Bailey voiced his concern in a podcast published on Monday by Sky News, co-hosted by former Chancellor of the Exchequer Sajid Javed, who appointed Bailey to the top role at the UK central bank.
His comments follow surprising resilience in the UK labor market, where unemployment remained just above a four-decade low of 3.9% in the three months to April. More up-to-date data suggest a 2% decline in salaried employees between February and May, with large numbers of companies taking advantage of the government’s furlough scheme to keep workers on payrolls. That scheme is scheduled to end at the end of October, with companies expected to pick up a portion of workers’ wages from the beginning of August.
Bailey also forecast a “period of natural caution” on the part of consumers “until this time next year,” noting that the government lockdown remains “popular with the public.” However, retail sales surged by 12.0% between April and May, more than twice the rise forecast by economists.
The governor’s caution suggests that monetary policy could remain extremely loose over the longer term, although he was not questioned about the Bank’s thinking on negative interest rates. Over recent weeks, a number of members of the Bank’s Monetary Policy Committee have admitted that sub-zero rates are under consideration.
The BoE implemented two emergency rate cuts in March, leaving its base rate at a record-low 0.1%. The Bank has only met “off-cycle” on four occasions through its three-century history, according to Bailey.
The governor also denied that the Bank is engaging in monetary financing, by acquiring such a large stock of government debt through its aggressive quantitative easing program. The UK government “would have struggled to fund itself” in the absence of BoE support, he said, although he hinted that central bank will not serve as a permanent backstop. “It’s not the Bank of England’s job to ensure that [government gilt auctions] don’t fail, he added.