Andrew Bailey, the new Governor of the Bank of England, was accused of producing overly optimistic forecasts on Thursday after the central bank said it expected an economic recovery in V from the coronavirus crisis.
Economists have questioned the BoE’s predictions that, after the worst 300-year recession in 2020, the economy would rebound strongly by 2021 without suffering significant and persistent damage.
Bailey made it clear at a press conference that the BoE’s monetary policy committee’s prediction of a strong recovery was his best estimate of what would happen rather than a scenario designed to make happier people amidst the restrictions of the British foreclosure. “I don’t think you will find us to be extremely optimistic,” he said.
But many economists disagreed, saying authorities should expect a slower than BoE recovery from the deep contraction brought about by Prime Minister Boris Johnson’s decision to impose the foreclosure on March 23 to curb the spread of Covid-19.
Krishna Guha, vice president of Evercore ISI, said: “The bank’s opinion on the coming rebound is undoubtedly bullish – far more than the opinion adopted so far by the central banks of the UK’s trading partners. United.”
Being so far from the mainstream of the central bank has raised the question of why the BoE thinks the slowdown will be so deep – about a 30% drop from peak to trough in 2020 – and the recovery so strong .
There is no doubt that the UK economy is in recession due to closings at home and abroad, and BoE staff expect gross domestic product to fall 3% in the first quarter, followed by ” a drop of 25% in the second.
It was more optimistic than the Office for Budget Responsibility, the UK budget watchdog, which said last month that it expected a 35% drop in GDP in the second quarter, but M. Bailey stressed that the differences were not significant.
Payment data, the BoE said, suggested that household consumption had dropped 30% since the introduction of the foreclosure.
Steven Bell, economist at BMO Global Asset Management, said the BoE was probably right on its assessment of the recession. “Forecasters underestimate the depth of the recession in the UK and the developed world,” he added.
But it is the speed of recovery announced by the BoE – all the contraction having been eliminated in the second half of 2021 and unemployment falling from 9% in 2020 to less than 4% in 2023 – that economists considered too optimistic.
The MPC said the risks to its forecast were down, but economists thought it was Panglossian and accused the BoE of underestimating the likely magnitude of bankruptcies and unemployment.
Jagjit Chadha, director of the National Institute for Economic and Social Research, a think tank, stressed that even with the BoE’s optimistic scenario, there would be persistent damage to the economy.
He added that after an initial push when the closure was lifted, the economy would not quickly return to its production level of 2019. “[The BoE’s forecast] is more optimistic than even our “reassuring” scenario, “he said.
Berenberg economist Kallum Pickering said BoE forecasts were “probably too optimistic”, in part because they assumed a smooth path to a trade deal with the EU and also because of what he expects to be “excessive precautionary savings” by households.
Most economists expect a slower recovery than the BoE and to make this clearer in the coming weeks, they expect MPC members to vote for further quantitative easing at their meeting. June.
Since launching a £ 200 billion quantitative easing program in March to buy existing government bonds, the BoE has successfully stopped a flight to the pound and fled the gilt market. This initiative enabled ministers to obtain new loans to finance large-scale aid to businesses and households in crisis.
At current gilt buying rates, the quantitative easing program will end in mid-July and the MPC would then have a choice between continuing to buy government bonds, maintaining long-term interest rates at current historical lows, or look to see where the cost of borrowing would settle if the private sector were to take a larger share of the total stock of public debt.
Fabrice Montagne, an economist at Barclays, said: “We see the bank as a catalyst for the government’s budgetary response to the crisis. . . We will learn as the data comes in and longer-term scars evidence should warrant further easing. “
Bailey is anxious not to be seen as directly funding the government by creating money for this, and said Thursday that the ministers had not used the BoE’s special account which is available to the government. State to pay for crisis measures.
But he would not rule out further drastic measures, stressing that it was right to closely coordinate with the government the response to the crisis. “I don’t think we are out of [monetary policy] “, he said.
BoE says banking system is resilient
The Bank of England said on Thursday that the heart of the banking system was resilient enough to be part of the solution to the coronavirus crisis.
In a first for the central bank, the BoE released a report on financial stability alongside its monetary policy statement and found that “the central banking system has more than enough capital buffers to absorb losses” during the pandemic .
“Backed by government guarantees for new loans and BoE funding, [the banking system has] the ability to provide credit to support the British economy, “he added.
BoE Governor Andrew Bailey said banks would suffer losses – due to corporate and household default during the crisis – but would be manageable if the economy followed the path set out in the latest forecasts from the central bank regarding the impact of Covid-19 and the foreclosure. .
He said the losses would be less than those contained in last year’s BoE bank stress tests, which covered a severe recession scenario.
“At £ 80 billion, the losses that banks could take in the test based on the scenario of the monetary policy report [about the virus crisis] are significantly lower than the £ 120bn loss that the banks were able to bear in the 2019 stress test, “said Mr. Bailey.
Banks’ core capital would remain “well above their minimum regulatory capital requirements,” said the BoE.
Bailey stressed the need for banks to continue lending, saying any credit restrictions BoE forecasts would boost unemployment by 2 percentage points to 11% this year and leave financial institutions even greater losses.
The BoE’s financial stability report said the banking system reacted well after the pound rush and the gilts’ flight in March, but Britain risked that tensions would re-emerge.
A greater immediate risk was the cash flow difficulties faced by British companies after their sales plummeted in the midst of a pandemic.
The BoE said companies are likely to forecast £ 110 billion in cash flow on a combined basis, of which £ 50 billion would be covered by the government’s job retention program and other measures. support.
About £ 20 billion of the remaining $ 60 billion in lost cash flow had already been covered by government-supported loan programs, said Jon Cunliffe, BoE deputy governor for financial stability. He said he was confident the banks were ready to close the rest of the gap.
If there was another lockout after a second virus outbreak, Bailey said:[the BoE] should react as best we can. ”