Bank of England’s Scheduled Policy Review Today Didn’t Augment Steps Taken Earlier in the Month

March 26, 2020

The Bank of England’s Monetary Policy Committee had lowered the bank rate from 0.75% to 0.25% on March 11 and by a further 15 basis points to 0.10%, a record low, on March 19. Officials also had lifted the ceiling on the purchases of gilt securities and corporate bonds to GBP 645 billion and had taken other actions to encourage bank lending and counter tightened financial market conditions. No further immediate action was taken today but a statement was released detailing how economic prospects have been altered by the coronavirus pandemic and laying out the roles of monetary policy and other government policies in this crisis. Here are some excerpts:

There is little evidence as yet to assess the precise magnitude of the economic shock from Covid-19. A very sharp reduction in activity is likely. Given the severity of that disruption, there is a risk of longer-term damage to the economy, especially if there are business failures on a large scale or significant increases in unemployment.

In the period leading up to the MPC’s special meeting on 19 March, yields on longer-term government debt rose. Additional demand for US dollar liquidity contributed to disruption in dollar funding markets, and in other usually liquid markets. The sterling exchange rate has depreciated sharply. Overall, UK and global financial conditions have tightened materially. All major central banks have set out wide-ranging policy responses that have helped to stabilize markets and improve liquidity in government bond markets.

The Financial Policy Committee (FPC) reduced the UK countercyclical capital buffer rate to 0% of banks’ exposures to UK borrowers at its policy meeting on 9 March.  This action supports the ability of banks to supply the credit needed by households and businesses.

The scale and duration of the shock to economic activity, while highly uncertain, will be large and sharp but should ultimately prove temporary. Monetary policy is aimed at guarding against an unwarranted tightening in financial conditions and, more broadly, supporting businesses and households through the crisis and limiting any lasting damage to the economy. The augmented asset purchases are being undertaken as soon as operationally possible, consistent with improved market functioning.

The MPC will continue to monitor the situation closely and, consistent with its remit, stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy.

At the time of the Brexit Referendum vote on June 23, 2016, the Bank Rate was 0.50%. As a precaution, it was halved to 0.25% six weeks later and remained at that Great Recession low until a pair of 25-basis point hikes in November 2017 and August 2018. The 65 basis points of cuts this months establishes a new record low.

Copyright 2020, Larry Greenberg. All rights reserved. no secondary distribution without express permission.

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