— Declines to provide timeframe for consideration of negative interest rates
By Laurie Laird
LONDON (MaceNews) – The U.K. may escape significant economic scarring as a result of the Covid epidemic, particularly if an effective vaccine becomes widely available in 2020, according to the country’s top central banker.
The Bank of England’s fears of permanent economic damage are “quite a bit lower than many other forecasts,” said Governor Andrew Bailey, addressing a Financial Times Global Boardroom event on Thursday. Bailey compared the current crisis more favourably to the disruption caused by the shift from an industrialised to a service-led economy, because “capital may be more re-deployable” within the service sector.
He also voiced optimism that positive clinical trials of a Covid vaccine could “allow” a range of UK “businesses to survive … without lasting changes in the structure of the economy.”
Bailey spoke shortly after the release of third-quarter gross domestic product data that fell short of the Bank’s forecasts. Output expanded by a record-breaking 15.5%, slightly below the BoE estimate of a 16.1% gain. That leaves the output 9.7% below pre-pandemic levels, compared to a 3.5% shortfall in the U.S. However, Bailey appeared sanguine about the latest release, noting that output stood at more than 22% below pre-pandemic levels at the end of the second quarter.
The governor confirmed that “detailed discussions” with banks over the ability of computer systems to process negative interest rates are continuing. However, the Monetary Policy Committee does not “have precise dates in mind” for when an evaluation of the efficacy of sub-zero rates may conclude.
Bailey admitted that the MPC has “talked about” the merits of yield curve control, but admitted that it’s “not something I see a great need for,” as the Bank’s current programme of quantitative easing has effectively reduced interest rates across a wide range of maturities.
However, Bailey refused to rule out suggestions that the December MPC meeting could be a “live” one, not least because the Bank may have a greater sense of future trade relations between the U.K. and the European Union. Current Bank forecasts reflect trade “disruption” over the first half of next year, even in the event that the two sides strike a free trade agreement. However, a no-deal Brexit could wreak havoc with forecasts, by exposing UK exports to tariffs set by the World Trade Organisation and potentially creating a toxic trading relationship between Britain and its European partners.