BoE's Bailey more positive on outlook, shows no worry about rise in yields

By William Schomberg

LONDON (Reuters) - Bank of England Governor Andrew Bailey said he was more optimistic about the economy, "with a large dose of caution," and a recent rise in interest rates in financial markets was consistent with the prospects of recovery from the COVID slump.

"We have seen some increase in interest rates over the last month or so, as have other countries. My assessment so far is that that is consistent, I think, with the change in the economic outlook," Bailey told BBC radio on Monday.

Bailey's comments contrasted with the message from the European Central Bank. The ECB said last week it would accelerate money-printing to keep a lid on euro zone borrowing costs which it feared could derail a recovery.

Britain has raced ahead with Europe's fastest vaccine programme, although Bailey cautioned the COVID-19 effect was huge.

The yield on 10-year British government debt was trading close to its highest level since last March, when the onset of the coronavirus pandemic caused a "dash for cash" among panicked investors.

Government bond yields globally have risen on hopes for an economic recovery after the introduction of COVID-19 vaccinations and a $1.9 trillion U.S. fiscal stimulus.

"I'm now more positive but with a large dose of caution," Bailey told the BBC.

The British economy might perform more strongly than the BoE predicted last month as households spend the savings they have accumulated during the lockdown, but there was also a risk from possible new coronavirus variants, he said.

Bailey said the British economy was get back to its late 2019 level around the end of this year. Last month, the BoE said the economy would reach that landmark by the first quarter of next year.

The BoE is expected to keep its benchmark interest rate at its historic low of 0.1% and its bond-buying programme unchanged at 895 billion pounds ($1.25 trillion) on Thursday at the end of its March meeting.

Bailey said he expected the BoE's next economic forecasts would show unemployment peaking at a lower level than the 7.75% jobless rate it predicted in February, after finance minister Rishi Sunak extended his programme to protect jobs on March 3.

He also repeated the BoE's message that the central bank would want to see more evidence than usual that it was hitting its 2% inflation target sustainably, and he said he did not see any signs of a big overshoot to 4% or 5%.

(Additional reporting by Guy Faulconbridge and Kate Holton; writing by William Schomberg; editing by Larry King)