BoE's Bailey sees economic 'scarring' from Covid-19 crisis

The governor of the Bank of England said the economy would be scarred by the Covid-19 crisis and that the BoE's scenario for a relatively quick rebound from the recession could be too optimistic.

Andrew Bailey said there was "no question" that the risks to the central bank's assumptions were on the downside. The BoE last week said output could plunge by 25% in the second quarter and 14% for 2020 but that a rapid bounceback was likely in 2021.

Economists are increasingly worried that the economy will be left scarred when it reopens - that permanent damage will be wrought on the welfare of businesses and individuals by the shock of the recession.

On Thursday Bailey told the Financial Times: "There will, I am sure, be some scarring. There is a huge amount of uncertainty over what that will be."

Reiterating comments made by Deputy Governor Ben Broadbent, Bailey said the BoE was not considering negative interest rates as a response to the crisis because it would raise problems for the UK's banks. He said cutting rates to below their 0.1% record low would be a "very big step" that would need an "extensive communications exercise".

Bailey said the BoE was effectively financing the government's extra spending during the crisis by buying more gilts as Chancellor Rishi Sunak increases borrowing.

He said the BoE was "smoothing a huge shock" that required the government to step in. But he said fiscal policy did not override the BoE's main objective of keeping inflation on target and that government borrowing was not cost-free.