Recovery is underway, but Bank of England warns risks remain

The economy is bouncing back from Covid-19 as businesses reopen and shoppers get spending but big risks remain over the recovery, the Bank of England said on Thursday.

Andrew Bailey, the Governor, and his colleagues voted to hold interest rates at 0.1pc, the record low reached in March, and held fire on a further expansion of its £745bn money-printing programme.

The Governor added that a move towards controversial negative interest rates was “in the tool box”, but that there were no plans to use them for now. 

Following moves such as the £30bn stimulus package unveiled by Chancellor Rishi Sunak in July to aid the economy, the Bank now expects the economy to shrink by 9.5pc this year – shallower than the 14pc slump it forecast in May.

The UK will remain 5pc below pre-Covid levels by the end of this year and will not resume pre-pandemic levels until the end of next year, taking slightly longer to recover.

The peak in unemployment is also expected to be shallower than the 9pc pencilled in May, at 7.5pc, but take until 2023 to return to pre-Covid levels of about 4pc.

Mr Bailey said the recovery in spending was “welcome”, but warned that the Bank “was not taking a strong signal from the recovery to date on what happens next”. 

Spending growth was likely to slow as caution lingered over Covid-19 with “uncertainty unusually elevated” and risks to the outlook were skewed to the downside, he added.

The Governor said:  “There are some very hard yards – to borrow a rugby phrase – to come, and frankly we are ready to act should that be needed.”

The Bank has been looking at the case for opening the door to negative interest rates, but its Monetary Policy Report listed a range of potential problems with the policy, including that it could end up hindering the economy instead of encouraging it. “Negative policy rates at this time could be less effective as a tool to stimulate the economy,” it said.

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