Jon Cunliffe, deputy governor at the Bank of England, believes the Covid-19 crisis is “very far from over” and predicts there is “likely to be a great deal of pain” to come for the financial sector.
In a speech given yesterday, the MPC member said that the first phase – the initial shock and adjustment to a far more challenging economic outlook in the near term – has passed.
However, he noted: “The depth and length of its economic impact remain very uncertain: it is clear that there is likely to be a great deal of pain for the financial sector. Given the economic hit – a very deep synchronised hit to the global economy – we can expect very significant losses on credit to firms and households.”
Cunliffe said economists would have to go back “over 300 years to find a similar sudden decline in economic activity” and believes the financial sector has “further to travel through the economic stresses of the Covid crisis”.
He stressed that any future news about the health crisis and consequent policy measures “could well spark another very sharp repricing of economic prospects and financial assets”.
In the UK, the stress test carried out by the Financial Policy Committee on the basis of the scenario for the economy in the MPC’s May Monetary policy Report, indicates the banks could face up to £80bn of credit losses over the next two years.
Cunliffe concluded: “Supported by central bank intervention, markets have certainly stabilised. Indeed, some seem to have fully recovered their pre-crisis levels. I would reiterate, however, that the crisis is far from over and further negative Covid-19 developments could cause financial instability to return.”