Bank of England governor Andrew Bailey has hailed positive developments in a coronavirus vaccine as a “big step forward”, but cautioned over long-term changes to the UK economy.
Addressing TheCityUK’s virtual conference, Mr Bailey warned business investment had been hit hard by the economic uncertainty caused by the pandemic and drawn-out Brexit negotiations.
But he said there was some “light at the end of the tunnel” thanks to the recent news of two possible effective Covid-19 vaccines from Moderna and Pfizer/BioNTech.
He said: “Of course there is a lot to do, and important steps to take and evidence to gather, but this is a big step forward, and it will play a major role in lowering the level of uncertainty.”
The Bank boss told the conference that as well as impacting business investment in the short term, there would be some structural changes in the UK economy following the pandemic.
He said: “None of us have good answers yet to how much these changes will persist, or even increase.
“But my best guess is that there will be lasting changes.”
He gave assurances that this would not be as “deep and painful” as the changes seen in the 1980s and 1990s, when the economy shifted from heavy industry and mining to a more services-oriented economy.
Britain is likely to see changes within the services sector, rather than across the economy as a whole, though this will take its toll on employment and there is no room for “complacency”, he cautioned.
He said: “Such a disruption can, of course, increase the mismatch of employment between firms and occupations, but we have a labour market that has shown the capacity to adjust relatively quickly to such changes.”
“But the prevailing level of uncertainty means there is no cause to be complacent here – and you should expect a central bank to remain cautious,” he added.
He said more financing will be needed to help firms survive the crisis, on top of the loans support provided by lenders, fiscal action from the Government and the Bank’s monetary policy action.
He stressed this was important without saddling businesses with “excessive” debts.
“While the current low level of interest rates supports the sustainability of UK corporate debt, higher leverage would make the corporate sector more vulnerable to interest rate or earnings shocks,” he said.
The Bank is working on ways the financial system can help increase financing for productive investment in Britain.
Mr Bailey also urged the financial services industry to make a “major commitment… to support the economy, businesses and the people of this country as we get back on our feet from the effects of Covid”.