Britain's recovery is being held back by fears that Covid will strike again, Andrew Bailey has warned, with key parts of the economy still operating at far below normal levels.
"Natural caution" among consumers and businesses has prevented a swift bounce back, the Governor of the Bank of England said.
He added that pubs, restaurants and other hospitality companies are still being shunned by fearful consumers - while firms of all kinds are reluctant to invest for fear of longer-term economic harm.
Mr Bailey's comments are likely to spark fresh concern that the UK's lengthy lockdown and particularly high death rate have left the public too scared to return to normal, following a Government publicity blitz earlier in the pandemic which stressed that coronavirus kills people of all ages and staying indoors is the only way to be safe.
The Governor acknowledged some strong signs of life in the economy, saying that household spending has surged back to its old levels remarkably quickly. Retail sales and the housing market are now effectively back to their pre-Covid size.
But even rapidly growing markets such as online retail could be counteracted by poor performers such as the high street as the economy goes through profound and lasting changes driven by a surge in internet use and remote working. This could potentially trigger mass job losses and push up unemployment for a time.
Speaking to MPs on the Treasury Select Committee, Mr Bailey said: “Household spending is now close to its pre-pandemic levels, but it is a pretty uneven picture.
“It is uneven in terms of its makeup across different parts of consumption. We have seen a very rapid recovery in the housing market, the numbers on mortgage approvals are very strong. Delayables spending, things like home improvements, has been strong.
“But social spending, of the type of eating out, still has not recovered strongly.”
Uncertainty over the future of the economy is also making businesses cautious.
Mr Bailey said: “So far the recovery of consumption, of household spending, has been very fast. That is to some degree, but not completely, offset by a very weak story on investment."
He added that a “natural caution” among those still worried about the virus is also a risk to the economy.
Consumers remain reluctant to travel on public transport, work in densely-packed offices or socialise. Just 37pc of UK office workers are back at their normal desks, according to research by Morgan Stanley, compared to 70pc across Europe.
Alex Brazier, a financial policymaker at the Bank, said offices are valuable to the economy and to workers’ productivity. However, he said that it is unlikely that workers will all come back to city centres at once.
Mr Brazier said: “With Covid-safe guidelines it is not possible to use office space with the intensity that we used to use it, so it is not possible to bring lots of people back suddenly.
“There are merits to working in an office when it comes to efficiency and collaboration and creativity, but because of those constraints I don't think we can expect to see a sudden and sharp return and return of people to very dense office environments.”
The risk of a slow return to normality, potentially delayed by local or national outbreaks, and a permanent shift in the way some industries operate, mean there are serious risks that the economy could take a long-term hit greater than the 1.5pc of GDP predicted by the Bank last month.
Mr Bailey said the Bank is ready to take more action if the economy requires extra support, for instance through more quantitative easing where it pumps newly printed money into the system by buying bonds.
In a “worst case” scenario - for instance where a major second wave of Covid, failed Brexit trade talks and another breakdown in US-China relations combine to trigger an economic meltdown - then the Bank could even consider taking interest rates below zero.
Although quantitative easing is more likely to be used first, in such a dire predicament “the case for bringing [negative rates] out of the toolbox would be strong,” Mr Bailey said.
Meanwhile deputy governor Ben Broadbent said fears that Threadneedle Street had descended into monetary financing - the taboo inflationary practice associated with 1930s Germany of buying up state debt with central bank cash - were “misplaced”.
The Bank has pumped £300bn into the economy through gilt buying to address the Covid-19 crisis while the Government has set out plans to raise £385bn in debt markets by the end of the year, raising suspicions among many economists.
But Mr Broadbent argued in a speech that the Bank’s credible inflation regime means that financial markets do not fear a rise in prices, despite the vast stimulus.
He added: “If the rise in government debt is caused by a weak economy, something that would otherwise depress inflation, easing policy is exactly what an independent, inflation-targeting monetary authority should be doing.”