Britain’s economy is not out of the woods and the damage caused by the Covid-19 pandemic has been only partly repaired, a Bank of England policymaker has said.
Speaking as fresh figures showed only a modest impact on consumer activity from “freedom day”, Jan Vlieghe said Threadneedle Street should be cautious about raising interest rates to counter higher levels of inflation emerging after lockdown.
Vlieghe said the UK was still grappling with the Delta variant of the virus and it was unclear what impact the removal of government support would have on an economy still struggling to return to pre-crisis levels of output.
“We are not out of the woods yet in terms of the virus and the impact on the economy. Yes, the economy has been growing rapidly, but on the most recent data it remains an average recession away from full employment,” he said.
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The retail analysts Springboard said Britons remained wary of returning to the shops despite the lifting of most remaining statutory restrictions on Monday 19 July.
Visits to retail hotspots soared by 16.5% on the day the government removed requirements for mandatory mask wearing and social distancing controls compared with the same day a week earlier. However, footfall over the next five days rose by just 1.7% on average, resulting in growth in retail visits of just 3.3% for the week as a whole.
Springboard said extremely hot weather had discouraged some shoppers, while there was evidence of consumer caution due to elevated rates of coronavirus infection and the heightened chance of being pinged by the NHS Covid app in a crowded area.
In comparison with the same period of 2019, footfall was 23.3% down, little changed on the 24.9% decline in the week before restrictions were lifted.
Against a backdrop of continuing consumer caution, Vlieghe said the Bank of England should ignore a temporary rise in inflation and that taking early action to bring down the cost of living would be a mistake.
In the latest of a series of interventions by members of the Bank’s monetary policy committee in the past fortnight, Vlieghe made it clear he would be opposing either an increase in interest rates or a scaling back of the quantitative easing programme when the committee meets next week.
He stressed that, even when action was appropriate, the Bank would not need to be too aggressive because long-term factors – an ageing population, higher levels of debt and rising inequality – were all pushing down on the level of interest rates needed to keep inflation in check.
Speaking to the London School of Economics before stepping down from the MPC at the end of next month, Vlieghe said: “I think it will remain appropriate to keep the current monetary stimulus in place for several quarters at least, and probably longer.
“And when tightening does become appropriate, I suspect not much of it will be needed, given the low level of the neutral rate.”
Vlieghe’s intervention reduces the chances of the Bank acting on 5 August, with only two members of the eight-strong MPC so far publicly supporting tighter policy in response to a rise in the annual inflation rate to 2.5%.
Michael Saunders and Dave Ramsden have both made the case for the Bank to start withdrawing some of the stimulus it has been providing, but Vlieghe said that even though the expected peak in inflation was likely to be higher than previously expected he still thought it would prove temporary.
“It is driven by supply bottlenecks and base effects, both of which are set to wane next year,” he said.
Although a forecast by the EY Item Club has said the UK is growing at its fastest pace in 80 years, Vlieghe said economic output in May was 4.5% below its December 2019 level. Unemployment was 300,000 higher than it was pre-crisis and 1.3 million people remained on furlough at the end of June.
“The Delta variant is still causing health and economic damage, both in the UK and in the rest of the world, in a way that risks feeding back to the UK economically,” Vlieghe said.
Noting that various government support schemes were coming to an end, including the furlough wage subsidy scheme, he added: “I would want to see how the economy copes with that before adding monetary tightening on top of fiscal tightening.”
