Economy at risk of stalling, Bank of England warns

Governor Andrew Bailey warns recovery at risk as second wave strikes and local restrictions tighten

Andrew Bailey has warned the economy is at risk of stalling and vowed to ramp up stimulus if needed, as he prepares to fight the damage caused by another Covid wave.

The Bank of England Governor said that risks to the recovery are “very much on the downside” amid surging cases of coronavirus and a new crackdown on freedom. But he added that Threadneedle Street has enough monetary firepower to tackle a second or third wave of the virus.

A surge in cases and fearful consumers could bring Britain's post-lockdown rebound to an end, Mr Bailey said. He also urged banks to draw on their reserves and inject more money into the economy despite a “natural unease” following the financial crisis.

The outlook for growth has darkened since August as local restrictions tighten, with stricter measures expected to be announced next week.

Speaking on a panel at the Single Resolution Board conference, Mr Bailey said: “The risks are very much on the downside and that of course reflects for all of us unfortunately the pattern of returning evidence of Covid.

"Secondly, I think unsurprisingly, the natural caution of people to engage in activity in view of that."

The Governor added that the Bank is “not out of firepower” and added that policymakers must use their tools “actively and aggressively”. 

Mr Bailey said banks and the economy would benefit from lenders using their "rainy day" buffer during the crisis.

The Bank released the cash buffer it makes banks hold when the pandemic struck, allowing them to keep supplying credit to the economy.

Banks build up extra capital when times are good so they can absorb losses if a downturn strikes. The reduction of the countercyclical buffer in March unleashed up to £190bn for lending.  

Mr Bailey said: “Using capital buffers to support the economy is not just to the benefit of the economy it's to the benefit of the banks as well. These things are very closely linked."

Mr Bailey’s comments came as the Bank's Financial Policy Committee (FPC), which monitors risks in the system, warned that some firms are struggling to access borrowing and this could “translate into signs of distress in the coming months”.

The FPC predicted that insolvencies will increase as companies struggle to cope with the economic crisis. Corporate borrowing costs are likely to rise when government loan guarantee schemes end, it added.

Brexit could also pose a risk to the economy if a deal with the European Union is not reached by triggering sharp swings on the markets, it added.

The FPC said: “Some market volatility and disruption to financial services, particularly to EU-based clients, could arise." 

However, the policymakers added that most threats to financial stability from Britain’s exit from the EU had been reduced after “extensive preparations” by authorities and firms. 

Brussels removed one of the biggest risks facing the financial system by granting market access to the UK clearing houses that are vital in greasing the wheels of international finance for an extra 18 months.