Andrew Bailey Says BOE Is Doing the Right Thing With Record Low Rates

Governor Andrew Bailey said the Bank of England’s main job is to help the U.K. weather the coronavirus, but it’s OK if the government also benefits from ultra low interest rates.

The central bank’s aim is to “support the economy as best as possible through this unprecedented shock,” Bailey told a webinar hosted by students at the London School of Economics on Friday. He said the bank’s independence isn’t threatened by moves that reduced borrowing costs, giving the Treasury more room for maneuver on fiscal policy.

The comments justify the bank’s decision to more than double its target for purchases of government bonds to 875 billion pounds ($1.2 trillion). That intervention kept U.K. debt servicing costs below pre-virus levels even as Chancellor of the Exchequer Rishi Sunak oversaw a record amount of borrowing to fund emergency aid for companies and workers.

Andrew Bailey Says BOE Is Doing the Right Thing With Record Low Rates

Some critics have suggested that the BOE has compromised its operational independence and is directly financing the government’s aims. Those “arguments are entirely without merit,” Bailey said, noting that the BOE doesn’t calibrate its asset-purchase plan to match the ambition of politicians.

“In a world where the government has to manage the task of spreading the cost of the pandemic which would otherwise fall on individuals at great cost to them,” it is “hardly surprising, and indeed consistent, that the government should be able to benefit from those financing conditions,” he said.

Bailey said that the true test of independence may come when officials decide to tighten policy. The BOE, he said, will do the right thing, because otherwise it would be in breach its remit and lose credibility with markets.

“The interventions we have made are effective because the bank is independent, and because we will reverse these actions when conditions require that,” he said.

In the speech, which looked at the challenges facing the modern central bank, Bailey also said the U.K. faces a period of below-target inflation. Inflation-targeting regimes must adapt during times of shock, he said.

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