BoE's Saunders says slow recovery needs 'aggressive' action

A Bank of England ratesetter has warned the economy is likely to recover slowly from the Covid-19 crisis and called for "aggressive" action to limit the risks.

Michael Saunders also said the chances of inflation getting out of control as the economy recovers were negligible and that monetary policy should aim to support the economy rather than ward off rising prices.

In a speech Saunders said business and consumer confidence was particularly fragile after the shock of the Covid-19 pandemic and that this would suppress spending and investment as the economy recovers.

This will lead to a relatively slow rebound that is likely to lead to more permanent "scarring" than other recessions and leave inflation below target, he said.

"Risk management considerations favour a relatively prompt and aggressive response to downside risks," Saunders said in an online presentation. "It is safer to err on the side of easing somewhat too much, and then if necessary tighten as capacity pressures eventually build, rather than ease too little and find the economy gets stuck in a low inflation rut."

Economists are looking for signs of how the BoE will respond to the worst recession since world war two after cutting interest rates to a record 0.1% and increasing its bond-buying programme by £200bn in March. Saunders did not refer to negative interest rates in calling for early action to support the economy.

UK unemployment rose by 856.000 in April to a 24-year high of 2.1m. Saunders said indicators suggested the jobless rate had risen to 9% with an additional 8m people furloughed under the government support programme.

Saunders said the "searing experience" of such a dramatic economic shock was likely to have lasting effects on economic behaviour, making people and business wary of taking risks and spending. The resulting slow recovery would leave people out of work for longer, reducing their chances of finding a new job, and increase the likelihood of business investment and failures.

"The greater the loss of potential GDP, the greater the likelihood that consumers and businesses downgrade expectations for future income gains and hence cut spending," he said. "If unchecked, there are risks of a vicious circle, whereby the economy gets stuck in a self-feeding loop of weak activity, pessimistic expectations and low investment."

Bearing in mind these risks, it is unlikely that inflation, which was 0.8% in May. will run away from the BoE's 2% target, Saunders said.

"When considering risks of persistent above-target inflation before we have recovered most of the lost ground, my attitude is I will believe it if and when I see it," he said.