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BoE's Bailey warns rising COVID cases will hurt economy

LONDON (Reuters) - Bank of England Governor Andrew Bailey warned on Tuesday that escalating COVID-19 cases threatened the outlook for Britain’s economy but pushed back against speculation that the central bank could soon cut interest rates below zero.

FILE PHOTO: Bank of England Governor Andrew Bailey poses for a photograph on the first day of his new role at the Central Bank in London, Britain March 16, 2020. Tolga Akmen/Pool via REUTERS

There were “hard yards” to come and the BoE would do everything it could to support the economy, Bailey said at an online talk hosted by the British Chambers of Commerce.

New COVID-19 cases are rising by at least 6,000 a day in Britain, according to week-old data, hospital admissions are doubling every eight days, and the testing system is buckling.

“We’re very unfortunately seeing a much faster and larger return of COVID. Obviously that does reinforce the downside risks we see in our forecast,” Bailey said.

The government said on Tuesday that pubs and restaurants must shut by 10 p.m. from Thursday onwards, and urged people to work from home where possible, reversing its previous call for employees to return to offices.

Last week the BoE said the economy had been recovering faster than it had expected in August, but that a resurgence in coronavirus cases could derail this.

Britain’s difficulty reaching a post-Brexit trade deal with the European Union, and broader global trade tensions, were also risks, Bailey added.

Bailey said parts of the retail sector and the housing market had been performing strongly, but he was concerned the underlying rate of unemployment was higher than the most recent 4.1% official figure for the three months to July.

The BoE forecasts unemployment will rise to 7.5% later this year, after a government job support programme ends next month. Bailey said the furlough scheme had been useful, but any replacement was for finance minister Rishi Sunak to decide on.

NEGATIVE RATES

Last week the BoE said it would look into how in practice it could take interest rates below zero -- something Bailey and other policymakers said previously was an option.

Some people in financial markets read this as a signal that the BoE was growing more enthusiastic about negative rates, which put downward pressure on sterling, but Bailey rejected that on Tuesday.

“It doesn’t imply anything about the possibility of us using negative instruments,” he said. “We have looked hard at the question of what scope is to cut interest rates further and particularly negative interest rates.”

Sterling rallied around a cent against the U.S. dollar and a similar amount against the euro after Bailey’s comments.

“It’s not at all clear that (negative rates are) going to work for the UK economy. But I think the Bank will have a better line of sight on whether it needs to do more come that Nov. 5 meeting,” said Gavin Friend, FX strategist at NAB Group.

The Japanese and euro zone central banks have cut rates below zero to encourage banks to lend instead of holding cash.

Bailey described other countries’ experiences of negative rates as a “mixed bag”, with their effectiveness depending on the structure of the banking system and the timing of the move.

Cutting below zero would hurt banks’ profits and potentially their readiness to lend, the BoE has said -- and could create problems with old computer systems not designed to accept negative rates.

Reporting by David Milliken and Andy Bruce, additional reporting by Maiya Keidan; Editing by Catherine Evans

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