The Bank of England still has ample firepower to fight the coronavirus crisis, governor Andrew Bailey said on Friday, arguing that the £200bn bond-buying operation the central bank unleashed in March had shown the value of “going big and fast” with quantitative easing.
Speaking at the virtual Jackson Hole central banking conference, Mr Bailey sought to refute the view that central banks, with little space to cut interest rates, lacked ammunition to fight off recession.
“We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid,” he said, while noting that “the choice of tool to use is more important than it has been at times in the past”.
The BoE believes the kind of aggressive bond-buying operation it launched in March — both larger and faster paced than previous rounds following the banking crisis and the Brexit referendum — shows that “going big and fast” with QE works best at times when markets are seizing up, with financial stress threatening to damage the economy.
The central bank took the emergency decision in March to pump money into the government bond market when it saw gilt yields start to fluctuate wildly, threatening a breakdown at the core of the UK’s financial system. The BoE has also helped the government fund a massive expansion of public spending to tackle the Covid-19 crisis, by agreeing to directly finance the state’s needs on a temporary basis.
As market conditions eased, the BoE Monetary Policy Committee voted in June to expand QE further, but to slow its pace, Mr Bailey said.
It then introduced new guidance in August, stating that it would not tighten monetary policy until there was clear evidence of inflation returning sustainably to target. The MPC has also made it clear that negative interest rates are “in the toolbox”, albeit unlikely to be used in the immediate future. Rates currently stand at a record low of 0.1 per cent.
Looking further ahead, Mr Bailey suggested that it might be necessary for the BoE to start unwinding its asset purchase programme before it raised rates, to make sure it had enough “headroom” to intervene decisively with a rapid burst of QE when the next crisis struck.
“If the effects of QE are more powerful in crisis states of the world, we may need to ensure that we have enough headroom in future to repeat it,” he said.
Mark Carney, Mr Bailey’s predecessor, had previously suggested that the BoE was likely to raise interest rates significantly before it began selling the assets amassed on its balance sheet.
Mr Bailey has taken a different view, arguing that central banks may need to start unwinding QE sooner to make sure there are enough safe assets available for them to buy in a future emergency.
At present, there appears little risk that the BoE will run out of safe assets it could purchase, he said. There is a large outstanding stock of government bonds and the BoE has already widened the scope of QE to include corporate debt.
But Mr Bailey warned that if the economy continued to suffer periodic shocks, before the BoE had done anything to unwind QE, then its balance sheet would continue to swell and the risk of it running out of suitable assets to buy would increase.
If central banks were forced to purchase a broader array of assets as a way around the problem, it would raise questions over risk management, he added.
“Let’s not ignore the need to manage central bank balance sheets,” he said. “There are times when we need to go big and go fast.”
https://news.google.com/__i/rss/rd/articles/CBMiP2h0dHBzOi8vd3d3LmZ0LmNvbS9jb250ZW50L2ZjNzFhZGZlLThiOGQtNDY1Ni1iYWZhLTI0YWRkNDE5YjE4ZtIBP2h0dHBzOi8vYW1wLmZ0LmNvbS9jb250ZW50L2ZjNzFhZGZlLThiOGQtNDY1Ni1iYWZhLTI0YWRkNDE5YjE4Zg?oc=5
2020-08-28 19:04:00Z
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