The pound ticked higher on Monday as Bank of England (BOE) governor Andrew Bailey said he was “more positive” about an economic recovery from the coronavirus pandemic, although it came with a “large dose of caution.”
Speaking on BBC’s Today programme, Bailey said he took a more “balanced” view than the Bank’s chief economist Andy Haldane, who has said that the UK economy could bounce back like a “coiled spring” this year.
“There’s no question that the vaccine programme is a great achievement,” he said. “The economic effects of the restrictions appear over time to be reducing.”
The governor said that the British economy might perform more strongly than the BOE initially predicted last month as households spend the savings they have accumulated during lockdown. However, he cautioned that there was also a risk from possible new COVID-19 variants.
He told the BBC he was looking at “new tools” to deal with the economic fallout, which could include negative interest rates.
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"The economy will actually get back at the end of this year to where it was at the end of 2019," he said.
Bailey also commented on the government’s furlough scheme, saying that it should “smooth the transition” after the end of lockdown and reduce the potential peak in unemployment.
The governor said unemployment was likely to peak at a lower level thanks to the “helpful” extension of furlough until September, however he warned that some job losses are still inevitable.
“Expecting a transition without some rise in unemployment I'm afraid is, is probably unlikely. We haven't done any forecast yet since the Budget but I would expect the next forecast to show the peak in unemployment will be lower,” he said.
Bailey said the Bank expected inflation to start rising towards its 2% target in "the next two or three months," adding that the Monetary Policy Committee would need to see "a lot more evidence" that the inflationary trend was sustainable before acting, given the "huge uncertainty" over the economic effects of COVID.
"We are not out of tools, we are not out of firepower," Bailey told the BBC.
He added that the damage being done by the current lockdown is smaller than during the first lockdown last spring – a fact that was confirmed in Friday’s GDP figures last week.
The UK economy shrank at the start of the year as the country returned to lockdown, but output declined by much less than economists were expecting.
Data published by the Office for National Statistics (ONS) showed UK GDP shrank by 2.9% in January. Economists had forecast a month-on-month decline of 4.9%.
Businesses have been better able to adapt to restrictions this time around and consumers have been more willing to spend.
Output in the services sector declined by 3.5% in January as schools and non-essential businesses were shut. However, the construction sector grew by 0.9%.
The ONS said GDP was 9% below pre-pandemic levels in January. Last October, following the recovery from the first wave of the virus, GDP was 4% below pre-pandemic levels.
The early estimate of economic output in January comes after a GDP expansion of 1.2% in December.
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