A breakthrough in developing a coronavirus vaccine is “very encouraging” for the UK economy, the Bank of England governor said on Thursday, strengthening the central bank’s view that the long-term restructuring needed after the pandemic will be more modest than in the 1980s or 1990s.
Andrew Bailey said the vaccine progress would reduce uncertainty in the BoE’s latest economic forecasts, although it did not change the central predictions. The BoE expects UK output to recover and regain pre-pandemic levels only in the first half of 2022.
Speaking at the Financial Times’ Global Boardroom event, the BoE governor said recent news on the efficacy of the vaccine being developed by Pfizer and BioNTech was consistent with the BoE’s assumption that there would be “a gradual and progressive improvement in [economic] conditions that would reflect a gradual advance of treatments".
“The news is encouraging,” he said, but added: “I think we have to be cautious because there’s still quite a way to go in trialling [a vaccine], in production and distribution, and putting all this into action.”
Mr Bailey was speaking shortly after the release of official data showing that the UK economy remained almost 10 per cent smaller than its pre-pandemic size at the end of the third quarter, with a rebound experienced in the summer starting to fizzle out in September.
He said this was broadly in line with the BoE monetary policy committee’s predictions, adding that while the recovery had been strong, it was very uneven and there was still a “huge gap” to close before the economy regained its former size.
He argued that progress in developing vaccines for Covid-19 would help limit the necessary structural changes in the UK economy, and the long-term damage stemming from the pandemic should not be as great as that seen after the major recessions of the 1980s and 1990s.
Then, a “very pronounced and sharp shift” between sectors, with heavy industry giving way to services, had led to a bigger degree of capital scrapping and structural unemployment, he said.
This time, the shift should be more within the services sector, with more scope to redeploy capital and retrain workers.
“The earlier a vaccine comes in, the more positive that is,” said Mr Bailey, as it would mean fewer businesses failing and “more muted” permanent changes to the economy’s structure.
Mr Bailey said the BoE might need to step up monetary support for the economy if the UK and the EU failed to finalise a trade deal and this led to greater economic disruption next year than the central bank’s current forecasts assume.
At present, the BoE expects a limited short-term hit to growth in the first half of 2021, but the governor said that if the UK and EU did not agree the terms of future trade, the impact would go beyond the cost of tariffs, because there could be less co-operation and goodwill in solving other problems.
However, Mr Bailey gave no hint that the monetary policy committee — which currently views quantitative easing as its main tool for monetary stimulus, adding £150bn to its asset purchase programme last week — was ready to use more unorthodox methods.
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The BoE was deep in discussions with banks over how negative interest rates could work, because it would be a “cardinal sin” to be unprepared at the moment when they were needed, he said, but there was still a great deal of work to be done before they could be deployed.
He said policymakers had also discussed the possibility of the BoE buying or selling as many bonds as needed to keep long-term yields below a set level.
But he added: “In the current environment we’re talking about all the tools that could possibly be in the mix . . . I don’t think it’s something I would see a great need for at the moment.”
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