LONDON (Reuters) - The initial shock of the coronavirus pandemic to Britain’s financial system is over, but another sharp repricing of risk is still possible, Bank of England Deputy Governor Jon Cunliffe said on Tuesday.
“The COVID crisis is very far from over. The depth and length of its economic impact remain very uncertain. It is clear that there is likely to be a great deal of pain for the financial sector,” Cunliffe said.
“However, the first phase - the initial shock and adjustment to a far more challenging economic outlook in the near term - has passed,” he added at an event hosted by the Investment Association, a fund management trade body.
Cunliffe said recent economic data pointed to some recovery in April and May, but it was early days and that he still thought the central bank’s most recent scenario of an unprecedented fall in output this year looked reasonable.
Negative interest rates remained under review at the BoE, but views on their effectiveness were mixed and the central bank would need to take into account the damage they could do to lenders’ business models, he added.
Financial markets saw bouts of extreme volatility in March as countries went into lockdown to fight the pandemic, shuttering businesses and paving the way to what is expected to be the worst economic contraction in Britain in 300 years.
Cunliffe said banks had been able to absorb a very severe market shock and this should not be put at risk by weakening their regulation.
Policymakers needed to look at ways to reduce surges in demand for liquidity and improve the supply of liquidity under stress, he added.
Some open-ended property funds remain suspended since the market volatility.
“We should look at the costs and benefits of having more liquidity resilience in the system,” he said.
Reporting by David Milliken and Huw Jones