LONDON (Reuters) - Britain’s economy is experiencing possibly its deepest economic shock in several centuries and a quick bounce-back is unlikely, Bank of England (BoE) interest-rate setter Jan Vlieghe said on Thursday.
“Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier than the UK, it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries,” Vlieghe said.
“The economy’s potential is severely disrupted at the moment but, once the pandemic is over, and other things equal, in principle it should return approximately to the pre-virus trajectory,” he said in an online speech.
Asked after his speech about the likely speed of Britain’s economic recovery, Vlieghe said it was likely to take time.
The government and the BoE were taking measures to try to reduce long-term scarring in the economy, he said.
“But of course all the risks are that it will take longer and that it will look a little bit more like a U and than a V,” he said.
BoE Chief Economist Andy Haldane and Deputy Governor Ben Broadbent have said cautious consumers might slow the recovery. BoE Governor Andrew Bailey said there was a lot of uncertainty about the outlook.
The BoE cut interest rates twice in March to an all-time low of 0.1% and ramped up its bond buying by a record 200 billion pounds ($247 billion) as the coronavirus escalated.
The government has rushed out a series of emergency measures too, including a pledge to pay 80% of the wages of workers who are temporarily laid off.
But last week, Britain’s budget forecasters warned that the economy could shrink by 13% this year, its biggest slump since the early 1700s, as a result of the government’s lockdown to contain the spread of the virus. They also said a quick recovery was possible.
On Thursday, a widely watched measure of business hit a record low and confidence among manufacturers was the weakest since records began in the 1950s.
Vlieghe said the hit to the economy was likely to push down on inflation: “So the current priority for monetary policy, with a lot of help from fiscal policy, is to return the economy to that pre-virus trajectory as soon as possible.”
The BoE’s Monetary Policy Committee (MPC) is due to make its next monetary policy announcement on May 7.
“The MPC stands ready to take further action to support the economy consistent with its remit,” Vlieghe said, adding the drive by central banks around the world to support their economies via bond-buying since the global financial crisis had not driven up inflation expectations.
He also addressed concerns the BoE was resorting to printing money with its bond-buying just to help the government ramp up public spending.
“Central banks use their balance sheets to achieve monetary policy objectives,” Vlieghe said. “This in no way detracts from the central bank’s independence and its ability to hit the inflation target.”
The BoE’s decision this month to expand the government’s overdraft facility at the central bank was “purely a back-up” to the government bond sales programme and would not affect the BoE’s job of focusing on inflation, Vlieghe said.
Reporting by Andy Bruce and William Schomberg; Editing by Mark Potter