BoE governor says UK has the firepower to withstand all the challenges

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. He said Britain’s gross domestic product in the third quarter was probably 7 to 10 per cent below its pre-pandemic levels. “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. 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”.

The summer there was 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.

He said that “scarring” from the crisis is difficult to judge, as past experience has demonstrated 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 meant it paid 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.

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 online webinar, when Mr Bailey made 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.

The key message is that capital buffers are there to be used, 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.”