BoE’s Andrew Bailey: UK battling uneven recovery but we’re not out of firepower

Bank of England will continue to use policy tools 'aggressively' as Britain faces a second wave

LONDON, ENGLAND - MARCH 16: Bank of England Governor Andrew Bailey poses for a photograph on the first day of his new role at the central bank on March 16, 2020 in London, England. (Photo by  Tolga Akmen - WPA Pool/Getty Images)
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Bank of England governor Andrew Bailey said on Thursday the regulator was not out of firepower to handle the “downside” risks faced by the economy as the country eyes a second wave of the Covid-19 crisis.

The economy’s recovery has been “very uneven,” with different sectors gaining more than others, Mr Bailey told an online webinar hosted by the Single Resolution Board, saying Britain’s gross domestic product in the third quarter was probably 7 to 10 per cent below its pre-pandemic levels.

There is an unprecedented level of uncertainty at the moment. And the risks, I'm afraid ... are very much on the downside.

“We are by no means out of firepower … in terms of our policy tools, and we will use that firepower, as appropriate, promptly and strongly in response to second and third waves where we think it is necessary and appropriate to do so,” Mr Bailey said.

"There is an unprecedented level of uncertainty at the moment. And the risks, I'm afraid – certainly as we see them - are very much on the downside.”

Britain experienced a record decline in economic output in the second quarter of this year, suffering a GDP contraction of 19.8 per cent in the three months to June - the biggest drop since Office for National Statistics data began in 1955.

While Mr Bailey’s GDP figures for the third quarter indicate a recovery from that dramatic second-quarter fall, he said the country is still in “a very big recession” with the economic recovery from the height of the pandemic “very uneven”.

The summer saw a “strong recovery” linked to the lifting of restrictions, he said, with some sectors gaining more than others depending on whether they relied on close social interaction.

“Other areas have recovered very strongly,” he said, “and are actually ahead of where they were pre-Covid.”

The pandemic will have a lasting effect, Mr Bailey warned, and he said “scarring” from the crisis is hard to judge, as past experience has shown that consistent unemployment can cause real damage in labour markets and lost outputs.

“How large and how long that will be is obviously a key issue,” he said.

Britain has been criticised for acting later than its European counterparts to implement restrictions at the start of the crisis – a move that saw it pay a heavy human and economic cost.

Last month, the BoE held interest rates at a record low of 0.1 per cent, as Mr Bailey said it did not intend to tighten monetary policy until economic conditions improve.

The UK regulator also left the size of its bond-buying programme unchanged at £745 billion ($965.05bn). The BoE hinted that negative interest rates to offset the effects of Covid-19 were in its monetary policy toolbox.

Going forward, Mr Bailey said the bank must use monetary policy “actively and expressively” in response to second and third waves.

“The crisis came upon us very quickly and in my view economic policy has done its job … looking across monetary policy, fiscal policy and instability policy, we use the tools very aggressively,” he said.

During the virtual webinar, which saw Mr Bailey make the ultimate remote working error of failing to unmute his speaker, the governor also said banks should not be uneasy about dipping into their capital buffers to ensure they can continue lending to the coronavirus-hit economy.

The key message to the banking sector is that capital buffers are there to be used at a time like the present, he said.

"I understand there is a natural unease to do that. Given the history of this, given the financial crisis, it's a brave person who says yes, I am going to run my capital ratio down," Mr Bailey said. "We have to use the stress test to demonstrate that is a realistic and sensible policy.”

Bailey said the current crisis had been the "first really big test" of reforms such as increased capital requirements introduced after the global financial crisis of 2008-09, with evidence those reforms achieved what they set out to do.

Sean Berrigan, head of the European Commission's financial services unit, agreed that eurozone banks were in a much better position to weather the Covid-19 crisis than they were a decade ago.

"We don't expect a 2008 experience, but we cannot rule that there will be problems with individual banks ... We are reassured that we are not going to face a wave of insolvencies," Mr Berrigan said.

The BoE’s September Financial Policy Committee meeting concluded that the UK banking system remains resilient and has the capacity to continue to support households and businesses.

“This reflects the build-up since the global financial crisis of substantial buffers of capital,” according to a summary of the meeting published on Thursday. Even if "the recent economic disruption were to be followed by events with an economic impact worse than that seen since March, and unemployment were to rise to around 15 per cent, the cumulative losses incurred by the major UK banks and building societies since the beginning of the pandemic would deplete only around 60 per cent of their buffers of capital.”

On the prospect of a trade deal between Britain and the European Union before a post-Brexit transition ends on December 31, Mr Bailey told the webinar it was vital that economies remained open.

"Nobody benefits from protectionism in my view," he said. “[Britain's post-Brexit transition] would have been easier had we not had to deal with Covid.”