The UK economy is recovering slightly quicker than the Bank of England expected a month ago as the coronavirus lockdown is eased, but news from the labour market is mostly negative, Bank of England governor Andrew Bailey said.
“As partial lifting of the measures takes place, we see signs of some activity returning,” Bailey said after the central bank announced a £100 billion pound increase in the size of its bond-buying programme but slowed the pace of purchases sharply.
The Bank’s Monetary Policy Committee (MPC) also voted unanimously to hold its main rate at the historic low of 0.1 per cent.
Speaking to reporters after the announcement, Bailey said that while certain signs of recovery were showing, the overall outlook remains uncertain.
“We don’t want to get too carried away by this. Let’s be clear, we’re still living in very unusual times,” he said.
Bailey: labour market news negative
Data released earlier this week showed that while the UK’s unemployment rate remained unchanged between February and April, job vacancies plunged to a record low and over 600,000 people lost their jobs.
Bailey said there was “no doubt we’re looking at the steepest trajectory of a rise in unemployment” in recent years “because of the rapid closedown of the economy”.
“On balance we think the news on the labour market is negative,” he added.
Deputy Governor Ben Broadbent said the government’s coronavirus job retention scheme makes it harder “to measure the health of the labour market,” with the UK’s unemployment risk probably on the downside because of the “scale of the furlough scheme”.
The latest figures show that over nine million people — a quarter of the country’s workforce — have been furloughed during the coronavirus crisis.
Pace of QE slowing from ‘warp speed’
Bailey said that the BoE’s plan to stretch its now £745bn quantitative easing (QE) programme until around the turn of the year was still faster than anything done by the Bank prior to the coronavirus crisis.
“We’re slowing from… warp speed to something that by any historical standards still looks fast,” he said.
Broadbent said the Bank now estimated that the UK economy was heading for a roughly 20 per cent contraction over the first and second quarters of 2020, compared with a fall of about 27 per cent included in a scenario it published last month.
Broadbent said negative news from Britain’s labour market was probably more significant for the inflation outlook — which is central to the BoE’s mandate — than then pick-up in activity.
Britain suffered a record fall in economic output in April, data from the ONS showed last week, with GDP contracting more than 20 per cent as lockdown measures brought large sections of the economy to a halt.
Asked about what action the Bank could take in the event of a second wave of infections in the UK, Bailey said the BoE’s response would be “very dependent on what the circumstances of the evolution of the second wave would be”.
He added that as well as the impact of a potential second spike in infections, it was important to factor in the public’s current concerns about a fresh wave of cases and how that could affect “their willingness to go out and participate in the economy”.
BoE ‘still assessing’ case for negative rates
Bailey said that the Bank is still assessing the case for introducing negative interest rates for the first time in its history, adding that taking borrowing costs below zero was not imminent.
“We haven’t ruled anything in and we haven’t ruled anything out,” he told reporters.
Bailey — who said last month that it would be “foolish” to rule out negative rates — added that the prospect of negative rates “raises important questions about implementation and communication”, but was “useful to have in the toolbox”.