Bank of England governor warns 'hard yards are ahead'

Speaking at a webinair hosted by the British Chambers of Commerce, Bailey said the rise in cases was "extremely difficult news for us and the whole of the country" and reinforced the downside risks to the Bank’s economic forecasts. "The hard yards are ahead of us", he said, noting that output was around 7-10% below pre-Covid levels.

On Monday, it was confirmed that new Covid-19 cases had passed 4,300 in the previous 24 hours with the R rate also increasing. The country’s alert level has been upped from 3 to 4, the second-highest, and the government is poised to unveil new restrictions, including a curfew for pubs and pulling back on earlier calls for workers to return to offices.

Prime minister Boris Johnson is scheduled to update Parliament around 12.30pm on Tuesday.

However, Bailey insisted the Bank would continue to do all it could to support the economy and did not rule out pushing out interest rates below zero.

He said: "The Bank of England is going to do everything we can do, within our remint and within our powers, to support he people and the business of this country. And we will do that.

"We’ve used asset purchases and quantitative easing very aggressively. It was the right thing to do. I believe that it had a very positive effect in the spring.

"We are still undertaking QE, so it is a tool in a box. We have looked hard at the question of what scope there is to cut interest rates further and particularly negative interest rates."

The Monetary Policy Committee left rates at 0.1% last week and minutes showed that the rate-setting committee had been briefed on exploring how a negative bank rate could be implemented.

However, Bailey insisted that "nobody should read more into" the statement, noting: "It would be a cardinal sin if we stated we had a tool in the box we didn’t think we could use in practice. It is no surprise we’re going to do this work."

A point in case was making sure that lenders' IT systems could handle negative interest rates.

Other considerations included the structure of the UK's banking industry and the point in the economic cycle at which the UK was at.

Neil Wilson, chief market analyst at Markets.com, said: "All the market wants to know is whether negative rates are coming or not. Bailey said the Bank has looked ‘very hard’ at the scope to cut rates further, including negative rates. So this was not the attempt to distance the MPC from the negative rate comments in last week’s release to give the central bank more flexibility. As the MPC indicated last week, Bailey wants to leave negative rates on the table."

However, TD Securities said: "Bailey’s speech confirmed our view from last week that markets had over-interpreted the Bank’s comments on negative interest rates in the MPC minutes. He downplayed the comments in the minutes, saying that nobody should read more into this as it’s just the next stage of the work to ensure that negative rates could be used if necessary.

"Outside the negative rates debate, Bailey stressed that the Bank would not be tightening policy any time soon [and it] would need ‘a lot of very strong evidence’ on the recovery before a shift in policy."

The economy tumbled 20.4% in the second quarter, putting the UK officially into recession. There were signs of recovery in July as lockdown measures eased, but the MPC has warned that the outlook remained "unusually uncertain" with a Brexit trade deal with the European Union yet to be secured and Covid-19 cases once again on the rise.