Bank of England governor Andrew Bailey warns of darkest hour as double-dip recession looms

Britain is facing its “darkest hour” amid a resurgence in coronavirus cases that will tip the economy back into recession.

The Bank of England have echoed the UK Chancellor of the Exchequer Rishi Sunak’s comments that the British economy is going to get worse before it gets better. Picture: AFP

Britain is facing its “darkest hour” amid a resurgence in coronavirus cases that will tip the economy back into recession, Bank of England policymakers have warned.

Governor Andrew Bailey said the second wave of infections and the third lockdown would delay the recovery, while Ben Broadbent, deputy governor for monetary policy, said the UK was in the grip of a “double-dip recession”.

“There’s a saying that the darkest hour is the one before dawn,” Mr Bailey told the Scottish Chambers of Commerce in an online event. “[We’re] in a very difficult period at the moment and there’s no question that it’s going to delay, probably, the trajectory.”

Their comments echoed those from Chancellor of the Exchequer Rishi Sunak, who on Monday said that “the economy is going to get worse before it gets better”. The bank will update its forecasts on February 4 at its next decision on interest rates.

Speaking at a bank webinar, Mr Broadbent said GDP was likely to have ended 2020 “around 10 per cent lower than at the end of 2019, the sharpest decline, through any calendar year, at least since 1920.

“The lockdowns mean that, on a quarterly basis, GDP is likely to have fallen in the fourth quarter of 2020 and to do so again in the first quarter of 2021,” he said. “This will no doubt prompt headlines about a ‘double-dip recession’.”

In a speech about changing spending patterns during the pandemic, Mr Broadbent conceded that lockdowns had “not produced the declines in underlying inflation that forecasters expected in the spring”, with core inflation at 1.4 per cent in November, “close to where it was at the end of 2019”.

Bank of England governor Andrew Bailey. Picture: AFP

However, he said the medium-term inflation profile would be determined more by jobs than spending habits. “I think it’s more conventional factors — economic risk rather than pandemic risk — that we should have in mind when thinking about what might happen to saving and consumption over the medium term,” he said. “Because we expect unemployment to rise once the furlough schemes are wound down, the appropriate response has been to ease policy significantly.”

Mr Bailey said official figures understated the true rate of unemployment, because of the difficulty surveys had in identifying those seeking work. He put the true unemployment rate at closer to 6.5 per cent than the 4.9 per cent official rate.

In November, the bank expected unemployment to peak at close to 8 per cent, but Mr Bailey said it was likely to be lower due to the chancellor’s decision to extend the furlough scheme to the end of April.

The governor also dampened prospects for negative interest rates. “In simple economics and maths terms, there is nothing to stop it at all. However, there are a lot of issues with it,” he said.

Such rates complicated banks’ ability to make profits and potentially hurt lending, he said. It was not easy to draw a direct parallel with similar action in the eurozone.

Silvana Tenreyro, another bank ratesetter, said on Monday that negative rates would work better than quantitative easing and said the side-effects had been exaggerated.

The Times