With UK interest rates at a historic low, the Bank of England is supporting lending and aims to ensure small businesses don't bear the brunt of the downturn.
The Bank of England cut the bank rate by 15 basis points to 0.1% on 19 March and announced a further £200bn of quantitative easing. This is the lowest bank rate ever and raises the spectre that monetary policy may have limited scope to boost the economy further.
Andrew Bailey, Governor of the Bank of England, told journalists that the Bank decided to act because of “very sharp moves in financial markets in the last few days, the pace of which was increasing very rapidly…[with] conditions bordering on disorderly”.
He noted that the 30-year gilt yield had been “whipping around” and said they were concerned that they “would have seen disorder moving into core markets”.
He said that the move was “clearly unprecedented” but the Bank could not wait for hard economic data. It had to respond to “the pace and severity of the impact of Covid-19…and the reaction of financial markets to it.”
Bailey said that the Bank is taking advice from epidemiologists as it tries to understand how the situation might evolve. He noted that, before 11 March 2020, there had only ever been two out-of-sequence meetings of the Bank’s Monetary Policy Committee. The 19 March 2020 meeting was the fourth.
Bank lending should continue
When asked if the Bank might move to negative interest rates, Bailey said, “It would be foolish for us to take anything off the table…this world has moved on at a frightening pace…[But] I have said a number of times that negative interest rates is not a tool I would want to use readily.
“There was a reason [we stopped] at 15 basis points,” he added. “We want banks to lend.” He pointed out that flattening the interest margins of lenders could “frustrate” that.
Bailey also said that monetary financing still has power to boost the economy.
“We are not giving up monetary financing,” he said. “We have taken into consideration what the likely scale of government financing will be – and that will be amplified through the markets.”
Firms will get funding
When pressed by journalists on what the Bank could do with interest rates so close to the zero lower bound, Bailey said: “We’re not done. The Bank of England will do what the public needs…The policy space has grown.”
He refused to be drawn on the potential policy actions. “We’ve got to get our thinking caps on about what the tools can be,” he said.
The Bank will aim to ensure that small businesses do not bear the brunt of the downturn. “If your bank is not being helpful, we are more than happy to intervene,” he said. “We have intervened once or twice already.” Bailey added that the heads of banks had stressed to him that they want to be helpful.
The Bank will support larger firms with loans by buying their commercial paper. “We want the commercial paper facility to meet the needs of as many firms as possible,” said Bailey. “So we are happy to look at asset backed finance.”