The resurgence in coronavirus cases in the UK is likely to set back the economic recovery and could require more monetary stimulus, a Bank of England policymaker has said.
Monetary policy committee (MPC) member Gertjan Vlieghe said that the growth in new cases meant there could well be more job losses than the Bank initially expected.
Coronavirus cases have surged in the UK in recent weeks. In response the government has introduced a “tiered” system of restrictions. It has put the toughest measures in place in Liverpool and Lancashire.
The Bank of England in August predicted that the economy would shrink 9.5 per cent this year – a modern record. It said unemployment would rise to 7.5 per cent.
However, Vlieghe said in a webinar today that the recovery “is likely to be slower”. He also said there is a risk of “a higher and/or more prolonged trajectory” of job losses.
The economist and external MPC member said: “The increase in virus prevalence since the summer [is] both a public health concern and an economic concern.
He said it “represents to some extent a crystallisation of the downside risks that the MPC has highlighted in our communications in the past six months”.
Monetary policy ‘skewed towards more stimulus’
Addressing monetary policy, he said more support could well be needed as the economy slows again.
“The risks to the monetary policy stance are therefore skewed towards additional monetary stimulus,” he said.
Simon French, chief economist at Panmure Gordon, said on Twitter: “Vlieghe sounds like he is voting for extra asset purchases next month.”
The Bank has slashed interest rates to a record low level of 0.1 per cent. It has also ramped up its asset purchase programme, often known as quantitative easing (QE), to £745bn.
Economists polled by Reuters think that the Bank will announce another £100bn of purchases when it meets next month. It is also due to give its quarterly update on the economy.
The Bank is also weighing up whether cutting interest rates into negative territory is possible. It is currently looking into how such a policy would work in practice, having added it to its “toolbox”.
Vlieghe said: “My own view is that the risk that negative rates end up being counterproductive to the aims of monetary policy is low.”
He said that, given how low interest rates already are, “we must consider ways to extend that headroom”.