The Bank of England is braced for the possibility that a mood of national depression that engulfed Britain as it plunged into a third national lockdown will end with a spending spree when restrictions are lifted.
In an interview with the Observer, the Bank’s governor, Andrew Bailey, said there was a chance after being cooped up for so long people would “go for it” once the vaccine programme allowed the economy to reopen.
Bailey said that while the crisis of the past 12 months had accelerated the shift to online shopping and would change working patterns, the long-term structural impact on the economy would be less pronounced than the shift from manufacturing to services in the 1980s and 1990s. “It won’t be as fundamental as that”, he added.
The governor added that the current lockdown – unanticipated by the Bank three months ago – had delayed progress on a new climate-change initiative, but insisted that Threadneedle Street was serious about tackling global heating.
The Bank’s priority over the past few weeks had been to assess the impact of the tough measures announced by Boris Johnson at the turn of the year to control the rapid spread of the new variant of Covid-19.
Bailey said the Bank’s monitoring of its own staff, almost all of whom are now, like him, working from home, had given him a feeling that the country had become markedly more downbeat at the turn of the year. “I could sense it from our institution. Hopes were raised by news on the vaccine, but then of course we had another lockdown and a big resurgence in Covid. The whole mood was pretty down, although it is alleviating now,” he said.
The Bank believes the success of the vaccine programme will allow the economy to bounce back strongly after contracting by more than 4% in the first three months of 2021. Bailey said the hit was much smaller than in the first lockdown last spring because people had learned how to adapt.
High Street banks and building societies have been given six months to prepare themselves for the possibility that Threadneedle Street will turn to negative interest rates to stimulate the economy, but the City is likely to see Bailey’s comments as an indication that such a radical step is a long way off, and may never happen. Interest rates were cut to a record low of 0.1% last March.
Threadneedle Street is monitoring what households do with an estimated £125bn in extra savings they have accumulated since the start of the pandemic. The Bank expects only 5% of the total to be spent, but Bailey said it could be more.
“The risk is on the upside – that after you lock people up for this long they go for it.” He added: “One interesting question is how much that desire to spend comes up against a supply side that doesn’t recover immediately.”
As well as cutting interest rates, the Bank has sought to boost the economy through quantitative easing, under which financial institutions sell bonds to Threadneedle Street in return for money.
Bailey said QE helped the economy by making lending cheaper and by generating increases in asset prices, which made people who owned houses and shares wealthier. While there was evidence of a growing gap between younger and older generations, he said: “It [QE] is working in the sense that the level of employment is higher than it otherwise would be and incomes are higher than they otherwise would be.” QE had been vital in stabilising financial markets during the first weeks of the crisis, the governor added.
Last month, the Bank was criticised by the Commons environmental audit committee for its failure to make sure its purchases of corporate bonds under the QE scheme dovetailed with the Government’s commitment to a green recovery from the Covid crisis.
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Bailey said the Bank would soon announce plans under which its bond-buying programme would incentivise companies to go green. Asked whether this might mean moving away from buying bonds issued by fossil fuel companies, the governor replied: “Yes, it could. We are serious about this issue and we are actively working on it now. We’ve got to turn words into actions.”
He added: “The other good news is that we are seeing a very big shift of gears in the US and that will internationally increase the push for change.” With Britain chairing the G7 group of industrialised countries and the UN climate change talks this year, Bailey said he was “pretty optimistic” that progress would be made.
While the Bank had predicted the outcome of Brexit trade talks, Bailey said it would take time to resolve differences over the treatment of financial services and the access of UK firms to the EU. “This is unfinished business,” he said.
