Bank of England policymaker Gertjan Vlieghe said additional monetary stimulus is needed as the coronavirus pandemic poses downside risks to the economy.
It appears that the downside risks to the economic outlook are starting to materialize, he said in a speech on Tuesday. “The outlook for monetary policy is skewed towards adding further stimulus.”
He observed that the speed of the recovery is likely to be slower while the virus prevalence remains a concern, with risks of a higher and/or more prolonged trajectory of job losses.
Since the negative interest rate has not been tried in the UK, there is uncertainty about its effectiveness, and the monetary policy committee is not at a point yet when it can reach a conclusion on this issue, the banker said.
According to Vlieghe, the risk that negative rates end up being counterproductive to the aims of monetary policy is low.
The next monetary policy announcement is due on November 5. The interest rate currently stands at 0.10 percent.
Although additional asset purchases remain an available policy tool, the effects of quantitative easing are state-dependent, and that a key channel through which QE works is by affecting expected future real interest rates, which are already very low, Vlieghe noted.
The economy is going through a process of unprecedented reallocation across sectors. The scale and persistence of the reallocation associated with both the pandemic and with Brexit, is likely to weigh on employment and investment.
The risks to the economic outlook are skewed towards a longer period of labour market slack with weak inflationary pressure.
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