Bank of England Governor Andrew Bailey has denied suggestions that the central bank’s economic outlook is too optimistic in the wake of its latest monetary policy report.
The Monetary Policy Committee (MPC) on Thursday held interest rates steady and maintained its asset purchase program at existing levels, while noting a sharper-than-expected but uneven economic recovery so far. The Bank revised up its short-term growth projections, but warned that a full recovery will take longer than initially forecast.
Bailey told CNBC’s Geoff Cutmore on Thursday that he would “really lean back on people who think the Bank of England is optimistic,” since although the data so far has shown recovery in certain parts of the economy, the MPC is “not taking any strong message from that going forwards.”
The central bank now expects U.K. GDP (gross domestic product) to shrink by 9.5% in 2020, compared to the 14% contraction it predicted in May. The economy is then seen rebounding by 9% in 2021, compared to the 15% forecast in May, and to grow by a further 3.5% in 2022.
The “X factor,” Bailey said, will be the evolution of the Covid-19 outbreak, with the Bank’s forecasts including the “largest ever degree of uncertainty in any forecast the MPC has done.” His comments come as modest containment measures are being introduced in parts of the U.K. amid fears of a second wave.
“Closely related to that is people’s natural caution in response to their perceptions and understanding of the evolution of Covid, and how people are cautious about re-engaging in economic activity,” Bailey said, adding that the BOE has seen evidence of this so far.
“The third thing … is to what extent there will be structural change in the economy, because there will be parts of the economy which are not viable, if you like, going forward,” Bailey added.
Some City analysts had expected the Bank to scrap its expectations for a “V-shaped” recovery. Although the August minutes from the Monetary Policy Committee state that GDP is not projected to recover to 2019 fourth-quarter levels until the end of 2021, rather than the second half of 2021 as previously forecast, the BOE’s base case for a sharp recovery remains broadly unchanged.
In response to Thursday’s announcement, Berenberg Senior Economist Kallum Pickering said: “The BoE’s overly optimistic updated economic projections leave the door wide open for more monetary stimulus later this year.”
“Relative to the obvious challenges ahead linked to the COVID-19 pandemic, highlighted by the recent re-imposition of modest containment measures in major parts of the UK, the V-shaped recovery that the BoE continues to project seems unlikely, to put it mildly,” Pickering added.
Berenberg economists expect the same 9.5% contraction in 2020 for the U.K. economy, but forecast a smaller 6.5% recovery in 2021 followed by 2.2% in 2022, with real GDP not returning to its 2019 fourth-quarter level until early 2023.
The BOE estimated that real GDP was more than 20% lower in the second quarter of this year than in the fourth quarter of 2019, and Bailey stressed that the recovery seen so far was “very unevenly distributed.” The Office for National Statistics will publish the official second-quarter GDP estimate on August 12.