BOE’s Bailey Rejects Monetary Financing in Virus Battle

(Bloomberg) --

Bank of England Governor Andrew Bailey rejected the idea of using monetary financing to help contain the economic impact of coronavirus, and said the bank’s current policies stop short of such action.

As the U.K. government massively ramps up borrowing to fund the economic response the pandemic, the central bank has boosted its own bond-buying plan by 200 billion pounds ($246 billion). That’s prompted some commentators to warn that leaves the bank at risk of directly funding government spending, and potentially unleashing a wave of runaway inflation.

Bailey rejected that charge in in an op-ed in the Financial Times published Sunday, saying “the U.K.’s institutional safeguards rule out this approach.”

“Using monetary financing would damage credibility on controlling inflation by eroding operational independence,” he added. “It would also ultimately result in an unsustainable central bank balance sheet and is incompatible with the pursuit of an inflation target by an independent central bank.”

While monetary financing is controversial, some have suggested it may be needed in the current crisis. One advocate is former BOE Deputy Governor Charles Bean, who last week said the central bank should buy bonds directly from the government, provided the holdings were unwound promptly once the crisis has passed.

When they launched their latest buying this month, BOE officials said they would keep the case for participating in the primary market “under review.” They said the same when they last expanded the plan in 2016.

Bailey has had a baptism of fire at the BOE, being forced to cut interest rates to 0.1% and restart quantitative easing within days of starting become governor on March 16. That was the second of two emergency actions taken by policy makers last month.

On March 26, officials warned that the economic fallout from the pandemic risked becoming entrenched, and signaled they were ready to provide further stimulus -- including expanding its asset purchase plan -- if needed. The central bank has also taken steps to keep credit flowing to U.K. firms of all sizes.

Bailey repeated the pledge to do more if needed in his op-ed, saying the BOE “will not hesitate to take all necessary actions both to support British businesses and households through this period of uncertainty.”

©2020 Bloomberg L.P.