Andrew Bailey has accepted that the Bank of England is effectively financing the government’s response to the coronavirus crisis, defending its stimulus policies as essential to cushion the pandemic’s blow to the economy.
The BoE governor, speaking at an FT digital conference on Thursday, said the central bank’s rapid expansion of quantitative easing made sense not only to calm financial markets and keep inflation on track, but also “in terms of smoothing the profile of government borrowing and the impact that might have on financial markets”.
Central banks would have to think hard about how to manage their much bigger balance sheets once the crisis was over, he said, but added: “I’ve no doubt that what we are doing is the right thing to do . . . smoothing a huge shock for which it is essential that government should step in.”
Costings by the Office for Budget Responsibility, updated on Thursday, suggest that the government’s fiscal response to the crisis — including extra spending on public services, welfare and support for businesses — will total at least £123bn, equivalent to around 6 per cent of national income.
This total is likely to increase, since the OBR said it could not cost the planned extension of the government’s furlough scheme beyond July, until it has details of how support for jobs will be tapered from then.
With tax revenues also down sharply, government borrowing is set to rise to £298.4bn in 2020-21, according to the OBR — compared with £54.8bn initially forecast at the March Budget.
Sir Robert Stheeman, chief executive of the UK’s Debt Management Office, told the Times earlier this month that the BoE’s asset purchase programme had been crucial to the functioning of the gilt market.
However, Mr Bailey made it clear that the BoE’s current policies did not match the more “extreme notions” of monetary policy — often used to imply an uncontrolled expansion of the central bank’s balance sheet at a government’s behest, which could lead to hyperinflation.
He said there was no question of “fiscal dominance”, in which a government’s fiscal objectives override the central bank’s task of keeping inflation on target, adding that government borrowing could not be cost-free, since the BoE was still paying interest on reserves.
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Mr Bailey recognised that the scenario for a relatively rapid recovery from the current deep recession, set out by the BoE in last week’s monetary policy report, could prove too optimistic, saying there was “no question” that the risks were to the downside.
“There will I am sure be some scarring. There is a huge amount of uncertainty over what it will be,” he said. But he argued that policies such as the furlough scheme could help employment recover faster than after a “normal” recession once the economy began to reopen and confidence that the country could avoid a second wave of infection returned.
Mr Bailey also acknowledged that UK banks might come under pressure if it proved necessary to keep lockdown measures in place. At present, they had headroom to weather the downturn, he said — not least because the government was absorbing some of the losses, and interest rates were likely to remain low. But he added: “there does come a point where if this goes on long enough, [financial sector stability] does come into question.”
Asked whether he would consider cutting interest rates below zero, Mr Bailey said it was not something the BoE was currently planning for or contemplating, since it would raise big issues for the banking sector and in terms of communication and managing market reactions.
Source: Economy - ft.com
