Bailey’s ‘Unwavering’ Pledge Signals Imminent BOE Action

(Bloomberg) -- The Bank of England signaled it could expand monetary stimulus as soon as next month to help the battered U.K. economy amid an outlook for a 14% slump that could be the worst in Europe.

Two of its nine policy makers wanted to immediately increase bond purchases -- the main policy tool now that the key interest rate is near zero -- by 100 billion pounds ($124 billion) at Wednesday’s meeting. The rest agreed that downside risks “might necessitate further monetary policy action.”

They noted that the current QE program will run out by early July, suggesting June’s meeting could see the bond-buying program of 645 billion pounds being lifted again, the BoE said on Thursday.

“The bank will act as necessary to deliver the monetary and financial stability that are essential for long-term prosperity and meet the needs of the people,” Governor Andrew Bailey said. “This is our total and unwavering commitment.”

The BOE published a scenario for the economy based on a sharp hit from coronavirus restrictions followed by a recovery. With most of the hit coming this quarter, it sees GDP being 30% lower by June compared with at the start of the year. Unemployment more than doubles to 9%.

While the BOE expects a strong rebound in 2021, the 14% slump in its scenario for this year is far sharper than the 8.3% predicted by the European Commission on Wednesday. It’s also deeper than the slumps predicted for Italy and Spain, though the assumptions for the projections may not line up exactly.

That BOE view is based on social distancing measures and government support schemes remaining as they are until early June, before gradually being unwound by the end of the third quarter.

Other European countries started to lift parts of the lockdown this week. In the U.K., the government is considering easing some of the more stringent measures, though the economy will likely continue to need support.

Lost Output

Jonathan Haskel and Michael Saunders were the officials who wanted to lift asset purchases. Most MPC members said there was value in waiting for more information on how the lockdown will be lifted, given the existing program hasn’t yet been completed. They said that would become more clear over the coming weeks.

The BOE assumes the U.K. economy recovers all its lost growth by late 2021. That’s relatively optimistic compared with the euro zone, where the European Central Bank’s central scenario doesn’t see a return to pre-virus strength until well into 2022.

The pound rose on that projected rebound and the decision not to increase bond-buying right away. It was up 0.3% at $1.2387 at 8:51 a.m. U.K. time.

Policy makers also warned that if banks don’t help companies through the cashflow strains of the virus lockdowns, there’ll be huge damage to the economy, and to banks themselves. Restricting lending could lead to a cascade of insolvencies, higher unemployment and falling house prices, all of which would ripple back to the financial industry.

“It is in the collective interest of banks to continue to supply credit to the wider economy,” the BOE said in its Financial Stability Report, also published on Thursday. “Continued expansion of bank credit is essential if deeper and longer lasting damage to the economy is to be mitigated.”

Like the Federal Reserve and the ECB, the BOE has slashed interest rates and increased quantitative easing since March to keep the economy afloat as activity ground to a halt. Bailey’s first forecast round follows a tumultuous first few months on the job and suggests he isn’t finished easing policy.

Officials voted unanimously to keep their benchmark interest rate unchanged at a record-low 0.1% this week.

Bailey will speak on a call with reporters later this morning and his comments will be published at 10 a.m. London time.

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