The UK economy is facing its “darkest hour” due the latest Covid-19 lockdown, which is likely to delay the recovery, the Bank of England governor has warned.
In comments on Tuesday that echoed warnings from the chancellor, Rishi Sunak a day earlier that the economy “is going to get worse before it gets better”, Bailey said the UK would bounce back, but only after the lockdown had ended and concerns about the spread of the virus had receded.
Referencing Winston Churchill’s use of the phrase in 1940 following the evacuation of Dunkirk, he said: “There’s an old saying about the darkest hour is the one before dawn.”
He added: “[We’re] in a very difficult period at the moment and there’s no question that it’s going to delay, probably, the trajectory.”
In an online speech to the Scottish Chambers of Commerce he said the shape of the recovery, while delayed, would broadly follow the forecast made by the Bank’s monetary policy committee (MPC) last November.
Bailey said the unemployment rate, which he previously expected to peak at about 7%-8% in the summer, would now be lower after the government extended its job protection scheme and other measures to safeguard household incomes.
However, the rate remained likely to rise above the 4.9% that official figures estimate for the three months to October.
Amid concerns that the UK will suffer a double dip recession after expected falls in GDP during the last quarter of 2020 and the first quarter of 2021, Bailey said the figure was already higher despite the extra measures that Sunak has announced, including a further £4.5bn last week for the hospitality sector.
“Our best guess nationwide is probably it’s around 6.5%,” Bailey said.
The MPC meets early next month to discuss how the central bank can help to protect the economy during the lockdown, including whether interest rates should be cut to below zero – a move that could ease borrowing costs on households and businesses.
Bailey said he was sceptical that a cut from the current all-time low of 0.1%would be painless, arguing it could make the situation worse.
He said there were “lots of issues” with cutting interest rates into negative territory and such a move could hurt banks.
“In simple economics and maths terms, there is nothing to stop it at all,” he said. “However there are a lot of issues with it.”
At its meeting in November, the nine-strong committee voted to launch a fresh £150bn stimulus package in response to the economy’s flagging recovery, taking the total amount of electronic money pumped into the economy to £895bn.
In December the committee said it would wait for further evidence of a downturn – and consider the impact of a Brexit trade deal – before committing extra funds to the stimulus package.
Bailey said the Bank had seen anecdotal evidence of disruption caused by Britain’s departure from the European Union at the turn of the year, but it was unclear how persistent the delays would prove beyond the first month of the year.
On Monday, one of the MPC’s nine committee members said she believed the likelihood of a further downturn following the third lockdown meant negative rates would benefit the UK economy and help it make a faster recovery.
Silvana Tenreyro said central banks in Japan and the eurozone had cut rates to below zero to support borrowing and she was likely to vote for the UK to follow suit when a review by the Bank was completed.
Officials at the central bank fear that negative rates will trigger a flight of savings, depleting the reserves of commercial banks and forcing them to cut back lending.
Bailey argued that it was not easy to draw a direct parallel with similar action in the eurozone, where banks have mostly passed on the benefits to large businesses while keeping household savings and mortgage rates at higher levels.