Michael Saunders, a member of the Monetary Policy Committee at the Bank of England, has said that a lack of investment through credit availability and cashflow would cause firms to prioritise cost-cutting and frugality rather than “longer term gains” from spending. But he added that inflation levels for consumers would drop to around zero this year.
It comes as the government has said it could buy stakes in certain companies that are deemed to be of particular economic importance.
And Rishi Sunak has said that the amount of money paid by the taxpayer to help fund the government’s furlough scheme will be cut in August, though it is not yet known what the new furlough scheme will look like.
Mr Saunders from the Bank of England was one of just two members in the nine-member Monetary Policy Committee who voted for an increase in a stimulus programme, according to the Guardian.
He set out a gloomy picture of the UK’s economic future, noting that both members of the public as well as businesses will be less likely to take financial risks after the economic damage that Covid-19 has caused.
An official from the Bank of England issued a gloomy outlook for the UK economy.
Saunders expects a “mood of caution” regarding big spending decisions, and that this may also include financial lenders who may impose higher credit risks or request more collateral before agreeing to loan cash.
He admitted that “a slow recovery would not mean no recovery”, but warned “a relatively slow recovery would be costly, not just in terms of leaving inflation below target and the economy operating with spare capacity for a longer period, but also because it would increase the long term costs to the economy from hysteria and scarring.”
The Monetary Policy Committee is apparently aiming to return UK inflation to its 2 percent target, but it expects that inflation could fall to “around zero” by the end of 2020.
Some may regard the term “inflation” with a critical eye, considering that it means an increase in the prices of goods and services over time.
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Saunders suggested the people and businesses may be less likely to spend and take financial risks.
But when kept at optimal rates, inflation can be a good thing that stimulates the economy because it drives consumers to purchase things more quickly.
On the other hand, some argue that inflation makes it harder for some workers to save money or increase their wealth and benefits some other others, according to Investopedia.
In any case, Saunders also addressed concerns regarding whether inflation might pick up too quickly, leading to greater costs for households and businesses alike.
Saunders said that the risk of inflation in the immediate post-Covid-19 environment will be low, even if some sectors do up their costs.
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Saunders said that inflation would remain below targets for the remainder of this year.
For example, some restaurants or airlines might incur extra costs because they are forced to put social distancing measures in place, and these costs may end up being reflected in what the customer pays.
And some companies might switch to “simple and resilient” supply chains in the immediate future even if they are more costly, before searching for cheaper supply chains as the economic situation becomes clearer.
But Saunders also highlighted that oil prices have been falling, and claimed that the Office for National Statistics has said in recent weeks more companies have been cutting prices than raising them.
Rishi Sunak is expected to announce today future changes to the government’s furlough scheme.
He said: “I think it is likely that, provided inflation expectations remain contained, the background of ample labour market slack and subdued activity levels will keep a lid on labour costs and margings, so that inflation will remain fairly limited as along as activity is well below its pre-Covid trend.”
Meanwhile, Rishi Sunak is expected to reveal today what the future of the UK’s furlough scheme might look like.
According to reports, the bill for covering the wages of people unable to work has so far come to £15 billion.