LONDON (Reuters) – Britain is likely to suffer an “extremely large” hit to the economy because of the lockdown to slow the spread of the coronavirus, and the Bank of England will only be able to limit some of the impact, policymaker Silvana Tenreyro said.
FILE PHOTO: A cyclist is seen infront of the Bank of England as the spread of the coronavirus disease (COVID-19) continues, London, Britain, April 14, 2020. REUTERS/John Sibley
Tenreyro, one of the central bank’s nine interest-rate setters, said the BoE, which took emergency action last month, remained ready to do what was needed to reduce the impact, but said monetary policy could only be a small part of the answer.
“The data we have so far suggest that the drop in aggregate spending already taking place will be extremely large,” she said in a speech text published by the BoE.
“This is partly by design: to safeguard public health and long-run prosperity, governments around the world have temporarily closed some sectors of the economy and limited consumption and production,” she added.
The BoE cut rates twice in March to take them to a record low 0.1% and launched a record 200 billion pounds quantitative easing programme to support the economy.
Earlier this week, Britain’s budget forecasters said the economy could shrink by 13% this year due to the shutdown, its deepest recession in three centuries, and public borrowing was set to surge to a post-World War Two high.
“The aim of our policy actions has been to ensure that the economic effects prove temporary, by minimising business failures and job losses that could cause a lasting reduction in the supply capacity of the economy,” Tenreyro said.
Tenreyro, an external member of the BoE’s Monetary Policy Committee, said her judgement was that in the parts of the economy still able to function, demand was falling faster than supply capacity, requiring continued economic stimulus.
“The MPC will continue to ensure price stability. It also remains ready to take whatever further actions are necessary,” she said.
But the help for businesses and individuals from the BoE and the government would not be enough to avoid a rise in unemployment which would push down on wage growth and inflation.
Tenreyro said she also saw upward pressures on inflation from sterling’s weakness and from higher government spending.
“As it did in the past, if there were an overshoot, the MPC would need to assess the speed with which to return inflation to target,” she said.
Temporary changes in spending patterns would make interpreting inflation data and other indicators challenging, she added – especially as some shifts, such as greater online shopping and reduced international travel might prove lasting.
The BoE is next scheduled to publish economic forecasts and an interest rate decision on May 7.
Reporting by David Milliken; Editing by William Schomberg