BOE Talks Up Prospect of Easing as U.K. Faces Triple Threat

(Bloomberg) -- The Bank of England is touting the firepower it can use to deliver more stimulus as the U.K. enters what could be a chaotic final few months of 2020.

Testifying to lawmakers on Wednesday, Deputy Governor Dave Ramsden said the BOE has the capacity to increase the pace and size of its bond-buying program if needed. Governor Andrew Bailey just last week said the central bank has plenty of room to add monetary stimulus, even including negative interest rates.

That public inventory of the BOE’s ammunition hints at how officials are bracing for a triple whammy of risks on the horizon. The combined threats of a resurgence in the coronavirus, a spike in unemployment, and a messy Brexit, are leaving the central bank largely flying blind.

Bailey emphasized that point on Wednesday, telling lawmakers that the uncertainty in the BOE’s forecast was already the largest ever, and that officials will also focus on the outlook for trade when they compile a new outlook in November.

A report from IHS Markit Thursday showed activity continued to rebound in August, albeit at a slightly slower pace that initially estimated. Markit said the speed of expansion, as measured by a composite Purchasing Managers Index, was at the highest in six years.

Still, “the concern is that the rebound will fade as quickly as it appeared,” according to Chris Williamson, the firm’s chief business economist. “The current expansion is built on something of a false reality.”

Brexit Worries

Britain already endured the biggest contraction among major economies in the second quarter. Now there are concerns that further lockdowns, or a failure to reach a deal with the European Union by the end of this year, could choke off a nascent recovery.

Meanwhile economists are warning that the end of government support for furloughed workers next month could leave millions out of a job.

Businesses expect the coronavirus to suppress sales and employment well into next year, the BOE’s survey of chief financial officers showed Thursday. Around 12% of employees are still relying on state subsidies.

Against that backdrop, officials say they’ve got plenty left in the tank.

“We have headroom to do materially more quantitative easing if we need,” Ramsden said, speaking in a video session with Parliament’s Treasury Committee that also featured Bailey and fellow policy maker Gertjan Vlieghe. We can “do it fast if market dysfunction required that.”

Those remarks followed on from Bailey’s declaration to the U.S. Federal Reserve’s Jackson Hole symposium that “we are not out of firepower by any means.”

Hardened Expectations

Economists and investors largely expect more monetary stimulus this year, and the remarks on Wednesday may have hardened their anticipation.

The BOE has already unleashed a raft of stimulus measures in the wake of the pandemic, including slashing the benchmark interest rate to a record-low 0.1% and raising its asset-purchase target by 300 billion pounds ($400 billion) to 745 billion pounds.

The pound fell to its low of the day after the comments, while 10-year gilt yields closed at their lowest level in more than a week.

Bailey and his colleagues painted a downbeat picture of the outlook, warning that the nation faces a long road back to recovery. The governor said the risks to growth remain to the downside, while Ramsden said the economy might have lost more than the 1.5% of output the bank currently estimates has been permanently destroyed by the virus.

“It could take several years for the economy to return to full capacity and inflation to return sustainably to target,” Vlieghe said in written testimony. “The longer the virus remains prevalent enough to affect patterns of consumption, investment and employment, the higher the likelihood that some sectors will not be able to return to their previous level.”

Policy makers delivered a slightly less pessimistic assessment last month, saying that the hit was shallower than initially thought, and the consumer-driven rebound was stronger than expected.

©2020 Bloomberg L.P.