Bank of England provides part one of the "kitchen sink" COVID-19 response

11 Mar 2020

Phil Shaw

Investec Chief Economist

Following emergency meetings, the Bank of England took several policy actions to stimulate the UK economy in the face of the growing coronavirus outbreak.

First, the Monetary Policy Committee (MPC) cut its main interest rate (Bank Rate) by 50 basis points to 0.25%, taking it back down to the level prevailing for 15 months in the wake of the European Union referendum in 2016. At the same time, policymakers kept the size of their asset-purchase programs on hold, with the amount of UK government bonds bought at £435 billion and corporate bonds at £10 billion.
 
Second, the committee announced a new Term Funding Scheme (TFSME) that will, over the next 12 months, provide businesses with four-year loans at a rate close to the new level of Bank Rate. The BOE stated that it expects to produce more than £100 billion of funds via the scheme, based on the 2016 exercise. The plan also includes additional incentives to lend to small and medium-sized enterprises.
 
Third, after an emergency meeting, the Financial Policy Committee (FPC) announced a reduction in the Countercyclical Capital Buffer (CCyB) to 0%. The prevailing rate was 1% but was due to increase to 2% at the end of this year. The FPC believes that this will potentially release £190 billion of lending to businesses.
The MPC minutes will be published on Friday 13 March at midday. Meanwhile, the FPC record will be released on 24 March (alongside that from the regular meeting on 19 March).
‘The various arms of the BOE [are] working together to provide a joined-up response on monetary and macroprudential policy.’
Also, the BOE’s Prudential Regulation Committee (PRC) is inviting requests from insurance companies to utilise flexibility arrangements to smooth out the impact of movements in markets.
 
This morning’s events demonstrate the extent of the BOE’s concerns over the economic impact of COVID-19. The motivation for the reduction in interest rates (the first 50bp move since March 2009) is obvious. But the TFSME scheme and the reduction in capital buffers show that officials recognise the dangers of second-round effects from COVID-19 having a longer-lasting impact on the economy.
What we have seen this morning is the various arms of the BOE working together to provide a joined-up response on monetary and macroprudential policy. What is due this afternoon is a further component of the co-ordinated policy response from the authorities in the shape of the budget. As well as a considerable degree of stimulus (which seemed due even ahead of the COVID-19 outbreak), further measures to ease coronavirus-related issues on businesses are undoubtedly on the cards.
 
Current BOE Governor Mark Carney hosted a joint press conference with his successor Andrew Bailey today. Both officials stressed the co-ordinated nature of policy. We suspect that the decision to take today’s action was recent. At the end of a speech at University College London last week, Dr Carney remarked that he had taken his final question as BOE Governor. Events over the past five to six days appear to have overtaken his intentions.
 
Although we are not explicitly forecasting any further action from the MPC, we would not rule out a cut in the Bank Rate to the presumed lower bound of 0.1%, or indeed a resumption of quantitative easing, at some stage. Indeed Messrs Carney and Bailey emphasised that they would take all necessary steps.
 
In terms of markets, sterling recouped initial losses to trade above $1.2950. The yield on 10-year gilts has risen by 4-5 basis points to 0.28%, mainly in response to a late rally on Wall Street last night. However, short-term interest rate markets have rallied by 10-15 basis points as markets partly price in a 15 basis-point Bank Rate cut to 0.10%.