LONDON (Reuters) - Britain’s central bank should “lean strongly against” downside risks to recovery from the COVID pandemic and be ready to stimulate the economy more if needed, Bank of England policymaker Jonathan Haskel said on Friday.
Commercial banks should follow BoE advice to make sure they are ready to implement negative interest rates, although the central bank does not yet know if they will be needed later this year, Haskel added.
“Risk management considerations dictate that policy should lean strongly against downside risks to the outlook and I remain open to the possibility that the economy might need further support to return inflation to the target sustainably,” Haskel told an online event.
“The transition away from government support represents a considerable test for recovery,” he added, looking ahead to the planned expiry of furlough programmes and other support measures at the end of September.
Britain’s central bank cut interest rates to a record-low 0.1% at the start of the pandemic in March and is midway through 150 billion pounds of government bond purchases that it aims to complete by the end of 2021.
Last month the BoE gave banks six months’ notice to get their systems ready for sub-zero interest rates, though some BoE policymakers would prefer to stick with bond purchases as the central bank’s main stimulus tool.
Haskel, an external member of the Monetary Policy Committee, said he saw a risk on balance that Britain would recover less rapidly from the pandemic than the BoE forecast last month and warned against beginning to tighten interest rates prematurely.
“It also means being ready to deploy, as and when needed, all the tools available to the MPC,” he added, referring to negative interest rates.
Characterising the rapid expansion in GDP which the BoE forecasts for 2021 and 2022 as ‘strong’ was misleading as it reflected recovery from a historic slump in 2020, Haskel said.
“I think therefore there’s little risk of sustained above-target inflation,” he added.
BoE chief economist Andy Haldane - who has discouraged what he sees as excessive pessimism about the growth outlook - warned last week that the “tiger” of inflation could be about to stir.
Britain’s economy was likely to suffer some permanent damage or scarring from the pandemic, after a record 10% fall in output. But unlike after the financial crisis, Haskel said he did not expect there to be a lasting slowdown in growth.
Most businesses were likely to return to office-based working after an extended period of working from home, limiting structural changes that could create long-term unemployment, he added.
Haskel was speaking at an event hosted by London’s Centre for Economic Policy Research and the University of Chicago Booth School of Business.
Reporting by David Milliken and Andy Bruce