Bank of England  

Carney warns of 'large economic shock' from Coronavirus

Carney warns of 'large economic shock' from Coronavirus
Mark Carney, governor of the Bank of England

The outgoing governor of the Bank of England has warned the economic shock from Coronavirus "could prove large", but predicted any fallout would "ultimately be temporary". 

Speaking at an evidence session in front of the newly-formed Treasury committee this morning (March 3) Mark Carney said the Bank was monitoring the potential impact of "confidence effects" on the market as a result of the outbreak.  

"The Bank of England's role is to help UK businesses and households manage through an economic shock that could prove large but will ultimately be temporary," he said.

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He added: "The Bank will take all necessary steps to support the UK economy and financial system consistent with its statutory responsibilities.

"We are monitoring the situation closely across all our functions and ensuring all necessary contingency plans are in place."

Mr Carney also said he was in continuous contact with his successor Andrew Bailey, who is set to take the helm at the Bank of England on March 16. 

The comments came after the Organisation for Economic Co-operation and Development (OECD) warned this week the Coronavirus crisis could see global economic growth fall from its previous estimate of 2.9 per cent to 2.4 per cent.

According to the inter-governmental body, a prolonged disruption could force growth down to as low as 1.5 per cent this year.

Mr Carney added: "The Monetary Policy Committee is accessing the economic impacts and considering the policy implications of various possible scenarios, including the extent to which supply disruptions have aggregate demand consequences via effects on cashflow, the cost and availability of finance as well as confidence effects."

If the problem were a lack of demand alone, then increased government spending could fill in for the lost demand in the short term.

According to FTAdviser's sister publication the Financial Times, the Italian government is to seek permission from the European Central Bank to increase public spending by £3.5bn this year to stimulate economic growth.

If the stimulus does not lead to growth because the problem is a supply rather than a demand shock, the impact would be higher inflation.  

Andrew Dixon, head of UK and international wealth planning at advice firm Kleinwort Hambros, said: "Prior to the Coronavirus scare [taking] root, we expected there to be no change to the Bank of England’s base rate of 0.75 per cent all year.

"Indeed, we expected a deluge [of] fiscal spending and a robust consumer buoyed by post-election domestic clarity to cause a fillip in growth. 

"However, given that Coronavirus is now slashing global growth projections, a nascent UK recovery may well have stopped in its tracks. Only time will tell how deep growth disruption will be."

Mr Dixon said whilst a recession was not the base case, he predicted a 25 basis point cut to interest rates was now "squarely on the cards".

He added: "While cutting from 0.75 per cent to 0.5 per cent won’t make much difference – particularly in the face of a virus scare which will cause demand destruction in services such as lost tourists, empty hotel rooms, restaurant meals forgone – it does signal the intent of central bankers to keep liquidity cheap and abundant, which may well be critical in avoiding recession."