LONDON (Reuters) – Britain’s economy is experiencing possibly its deepest economic shock in centuries, but it should recover its pre-coronavirus crisis growth pattern once the pandemic is over, Bank of England (BoE) interest-rate setter Jan Vlieghe said on Thursday.
“Based on the early indicators, and based on the experience in other countries that were hit somewhat earlier than the UK, it seems that we are experiencing an economic contraction that is faster and deeper than anything we have seen in the past century, or possibly several centuries,” Vlieghe said.
“The economy’s potential is severely disrupted at the moment but, once the pandemic is over, and other things equal, in principle it should return approximately to the pre-virus trajectory.”
The BoE cut interest rates twice in March to an all-time low of 0.1% and ramped up its bond buying by a record 200 billion pounds ($247 billion).
Britain’s budget forecasts warned on April 14 the economy could shrink by 13% this year, its biggest slump since the early 1700s, as a result of the government’s lockdown to contain the novel coronavirus.
Vlieghe said in an online speech that he thought the hit to the economy was likely to push down on inflation.
“So the current priority for monetary policy, with a lot of help from fiscal policy, is to return the economy to that pre-virus trajectory as soon as possible,” he said.
The BoE’s Monetary Policy Committee (MPC) is due to make its next monetary policy announcement on May 7.
“The MPC stands ready to take further action to support the economy consistent with its remit,” Vlieghe said in his speech.
Vlieghe also addressed concerns the BoE was resorting to printing money on a permanent basis to help the government ramp up public spending.
“Central banks use their balance sheets to achieve monetary policy objectives. In doing so, they affect government finances,” he said.
“That has always been the case, and that continues to be the case. This in no way detracts from the central bank’s independence and its ability to hit the inflation target.”
The BoE’s decision this month to expand the government’s overdraft facility at the central bank was “purely a back-up” to the government bond sales programme and would not affect the BoE’s job of focusing on inflation, Vlieghe said.
($1 = 0.8095 pounds)
(Reporting by Andy Bruce and William Schomberg; Editing by Mark Potter)