‘Baptism of Fire’ Awaits New Guardians of British Economy
The two new leaders of the British economy need to hit the ground running and in lockstep.
(Bloomberg) --
The two new leaders of the British economy need to hit the ground running and in lockstep.
Chancellor of the Exchequer Rishi Sunak is less than a month into the job. Andrew Bailey doesn’t even become Bank of England governor until next week. But both are being thrown straight into a battle to protect the economy.
The coronavirus threat has already meant emergency meetings, warnings of economic pain and hints of crisis-era policy measures. Sunak, 39, has had to retool his Budget on Wednesday to focus on the virus response, something that may include joint action with the BOE.
Possible steps include purely fiscal ones like increasing spending on the health service and support for businesses. The Treasury and Bank of England could unite to guarantee bank lending, or the latter could even announce an emergency interest-rate cut. A successful joint operation could be a model for other governments and central banks.
They “face a baptism of fire as they take up their new roles,” said Elizabeth Martins, senior economist at HSBC Holdings Plc. “While both might have intended to proceed with caution, the global outbreak of COVID-19 and the consequences for markets mean now is not the time to hold back.”
Across the world, the outbreak has shut factories, stores and offices, and forced entire regions into lockdown. Troubled U.K. airline Flybe collapsed last week. Overnight, Germany eased rules on companies applying for aid to offset wages when they are forced to temporarily halt work.
But Monday saw markets in a panic, with European equities and U.S. futures plunging. Oil prices crashed, and the yields on U.K. benchmark bonds fell below zero for the first time.
Weak Position
Even before the full scale of the virus became apparent, economists were forecasting U.K. growth of just 1% this year, which would be the worst performance in more than a decade. Also rumbling in the background are Britain’s trade negotiations with the European Union, still a source of huge uncertainty.
Sunak will present his Budget facing the most serious threat to the economy since the financial crisis a decade ago. According to the Sunday Times, ministers have warned local authorities to prepare for a potential death toll as high as 100,000.
In interviews on Sunday, Sunak pledged to respond “at scale to whatever scenario comes our way” and indicated that fiscal rules designed to keep spending in check could be relaxed.
“This could be a challenging period for businesses,” he said on Sky News.
As the front line in the battle against the virus, the National Health Service would receive the resources it needs, he told BBC Television. He hinted that companies facing cash-flow problems would receive forbearance on their tax bills to help them “bridge through a difficult time.” There could also be help for people on flexible contracts who are forced to stay away.
When Bailey, 60, takes over from Mark Carney in a week, he could be under pressure to cut rates quickly if such a step has not already been taken. The BOE’s next scheduled Monetary Policy Committee announcement is on March 26.
Speaking to lawmakers last week, Bailey noted that there’s room to move. But not much given the benchmark is just 0.75%.
He also suggested that collective action between the central bank and Treasury may be needed to offset the impact on companies’ cashflow. U.K. surveys already point to delivery delays and cancellations.
Other BOE options include relaunching a scheme to encourage banks to lend and reversing a hike to the amount of capital banks must hold.
“A rate cut alone is perhaps not going to be enough,” Martins said. “Assistance to businesses is going to be key. That might mean getting loans to companies where actually maybe some of the risk is on the government, as opposed to the banks.”
The Budget was originally intended to be a showcase for Prime Minister Boris Johnson’s plan for investment to raise the country’s long-term growth potential. Now, the virus response is taking priority.
Both Sunak and Bailey are newcomers to their roles, albeit with vastly different degrees of experience.
Bailey, 60, a former BOE Deputy Governor, helped shaped the U.K.’s response to the financial crisis, though he never been directly involved in setting monetary policy. Most recently, he’s run the country’s banking regulator.
Sunak only became an MP in 2015 and was elevated to run the Treasury only after the resignation of Sajid Javid. He does have experience in finance including a stint at Goldman Sachs Group Inc.
The lack of time in their new posts and the fact that Johnson has yet to reach his first anniversary as prime minister contrasts with the U.K.’s leadership during the financial crisis.
Then, the country was led by Gordon Brown, who’d spent more than a decade as chancellor and then prime minister. BOE Governor Mervyn King was well-established in Threadneedle Street, having been in charge for five years, and been deputy governor before that.
While Bailey won’t begin his job until March 16, he’s already in contact with the chancellor. Last Thursday, Sunak, Johnson and Carney also held a rare joint meeting in the prime minister’s office.
Most policy makers “have been very keen to point out that this is not a task for monetary policy acting on its own,” said Cathal Kennedy, an economist at RBC in London. “This is a task which the fiscal authorities have to take a certain amount of responsibility for.”
--With assistance from Andrew Atkinson.
To contact the reporters on this story: Jill Ward in London at jward98@bloomberg.net;David Goodman in London at dgoodman28@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Catherine Bosley, Alaa Shahine
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