BoE's Bailey sees long road to recovery

Bank of England Governor Andrew Bailey warned there was a long, uncertain road to get the economy back on track after the central bank published more upbeat forecasts for 2020.

Leaving interest rates unchanged on Thursday the BoE predicted the economy would shrink by 9.5% in 2020 in an upgrade from its previous estimate for a 14.5% contraction. The BoE also revised down its growth estimate for 2021 to 9% from 15%.

"There is a lot of hard work to be done to get the economy back to where it was," Bailey told Bloomberg. "We've had quite a rapid recovery so far which I'm not surprised about as restrictions are lifted but there's a lot of hard yards to be done from here onwards."

He said risk in the BoE's forecast was skewed to the downside and that it was prepared to "lean in" to support growth if needed. He said the main measures at the BoE's disposal were buying more bonds under the quantitative easing programme, cutting interest rates to below zero and using forward guidance to steer markets.

Bailey said the BoE's monetary policy had spent a lot of time considering the potential value and risk of negative interest rates. "Negative rates are in the toolbox but we're not planning to use them at the moment," Bailey said.

The governor said the BoE had spoken to central banks in countries that had adopted negative rates and had learnt that doing so causes monetary policy to get caught up in the banking system. Critics of negative rates argue that they are counterproductive because they make banks unprofitable, restricting their ability to lend.

Bailey said he supported the government's handling of the economic aspects of the crisis, including the furlough programme that has paid most of laid-off workers' wages. Many economists are concerned that ending the support in October will lead to a deluge of job losses and that the BoE will be forced to act then.

Anna Titareva, European economist at UBS, said: "As the job retention scheme comes to an end in October, a combination of higher unemployment and social distancing measures are likely to weigh on household consumption and fixed investment, slowing the pace of recovery."

Titareva said she expected the BoE to announce £100bn more of QE in November and ease the terms of its loan scheme for small businesses.

"Given the MPC's assessment … suggesting that negative rates 'at this time could be less effective as a tool to stimulate the economy', we doubt the MPC would choose to cut Bank rate into negative territory before adapting other unconventional policies," she said.