Bank of England Governor Andrew Bailey painted a cautiously optimistic picture for Britain’s economy after the COVID pandemic and did not expect a big jump in inflation, which his chief economist and some investors see as a risk.
“If I had to summarize the diagnosis, it’s positive but with large doses of cautionary realism,” Bailey said in a speech to the Resolution Foundation, a think tank.
A slowing of COVID infections and the “huge achievement” of Britain’s vaccine program meant there was light at the end of the tunnel, he said.
After suffering Europe’s highest COVID death toll, and the country’s biggest economic shock in 300 years, Britain has rolled out a fast COVID-19 vaccination program which has reached more than 40% of adults for a first shot.
Finance minister Rishi Sunak’s decision last week to extend his jobs support program until the end of September was likely to limit the peak in unemployment but was unlikely to completely stop joblessness rising after it ends, Bailey said.
Sunak’s budget also included measures to support economic growth through significant investment in infrastructure, skills and innovation, he said, potentially easing one of the drags on Britain’s economy.
But there was a lot of uncertainty about how much the changes in the economy caused by the pandemic would persist.
“We will work more from home than we used to and shop more online because new habits will persist to some degree, and to the extent they unwind it will be over a period of time,” Bailey said.
Last month, the BoE said Britain’s economy would probably contract by 4% in the first three months of 2021 before recovering rapidly over the rest of the year to regain its pre-pandemic size by the first quarter of 2022.
Bailey said the expected recovery would be helped by the BoE’s ultra-low interest rates and its bond-buying program, “and in my view it amply justifies our current stance on monetary policy.”
He said the central bank’s task was to get inflation back up to its 2% target and hold it there, striking a different note to BoE Chief Economist Andy Haldane who last month said an inflationary “tiger” had awoken.
Yields on bonds issued by governments in Britain and other countries have climbed sharply in recent weeks as investors price in higher growth and inflation on the back of trillions of dollars of stimulus pumped into the global economy.
“For the moment, I would say - viewed from where we are today - our task is to get inflation up to target, frankly,” Bailey said. “Our task... is to get it towards target and hold it there.”
He said contingency work by the BoE for the possible future use of negative interest rates, combined with work on new guidance about how it might do the opposite and tighten policy, were a recognition of the “two-sided nature of the risks we face.”
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