Britain’s rapid economic recovery could stall in the coming months, potentially pushing the Bank of England to ramp up quantitative easing yet again, a senior policymaker has said.
Unemployment is set to rise as the furlough scheme ends and the boost from ending lockdown could fade, according to Michael Saunders, who votes on interest rates as a member of the Bank's Monetary Policy Committee.
“I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the 2pc target,” he said.
This raises the prospect of more QE later this year, on top of the £100bn announced in August and the £200bn launched in March. The Bank is already buying £4.5bn of Government bonds every week using money created under QE, and expects to keep this up until the end of the year.
The aim is to keep interest rates down in financial markets to encourage more spending and investment to boost the economy. It also helps the Government finance its enormous deficit, though that is not a specific aim of the policy.
The Bank has also discussed the possibility of taking interest rates negative.
Although the economy has recovered more rapidly than the Bank anticipated, Mr Saunders said he remained cautious and thinks more support could be needed.
“I would be cautious about extrapolating much from this apparent outperformance,” he said.
“I also suspect that government support measures – for example the job retention scheme, increased benefits, tax payment deferrals, mortgage holidays and so forth – turned out to be more powerful than expected in supporting household incomes and spending.”
This has “shielded” households from the full extent of the economic crunch, which they could start to suffer in the coming months.
“The economy in June, July and August has benefited from a relatively benign confluence of factors: fiscal support has remained very high, the easing of lockdown has allowed more spending including pent-up demand, while the lagged effects of lockdown have kept infection rates low and reassured consumers. However, even that very limited sweet spot may now be fading,” Mr Saunders said.
There is a risk of longer-term “scarring” on the economy, if families become reluctant to spend and want to save instead, businesses shy away from investing and workers struggle to find new jobs.
Given this danger, Mr Saunders indicated he is in favour of keeping rates lower for longer, and that he leans towards pumping out more stimulus, not less.
“My hunch is that risks lie on the side of weaker growth,” he said.
“A downside scenario would be very costly. It would imply greater long-term scarring on potential growth through hysteresis effects. Risk management considerations imply we should lean strongly against downside risks at present.
“I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the 2pc target.”