U.K. Is a Test Case for Joined-Up Economic Action on Virus
U.K. Emerges as Test Case for Joined-Up Economic Action on Virus
(Bloomberg) -- Britain may once again become a model for fighting an economic slump more than a decade after setting the tone in the financial crisis.
The government is due to unveil its budget on Wednesday, a major fiscal set piece that’s now likely to unleash some short-term stimulus to combat the coronavirus. With the Treasury and central bank stressing they are working together to craft a response, the stage is set for the coordinated policy action investors have been crying out for after the biggest market rout in more than a decade.
Traders are already pricing in a Bank of England interest-rate cut of as much as a half point this month, and the turmoil has led to increasing speculation among analysts and investors that move could come alongside the budget.
The U.K. currently has about 300 confirmed cases of the virus, out of about 110,000 worldwide.
“The panic taking hold in markets also raises the chance of an early rate cut either on Wednesday, as part of a broader package of measures by U.K. policy makers, or even before then,” said JPMorgan Chase & Co. economist Allan Monks.
With markets in free-fall and anxious consumers stockpiling essential goods, pressure is mounting on authorities in the world’s biggest economies to contain the crisis. A week after Group of Seven finance chiefs and central bankers pledged a coordinated response, the U.S. Federal Reserve and the Bank of Canada are the only major central banks to cut interest rates.
As well as a spending boost to shepherd hospitals, firms and workers through the disruption, the U.K. Chancellor of the Exchequer Rishi Sunak may also announce other joint policies between the institutions, such as measures to help financing for small businesses.
The central bank may stay on the sidelines this week, keeping its powder dry for a scheduled Monetary Policy Committee meeting on March 26. The risk is that whatever is announced won’t pack enough punch to calm the panic that has seen some British government bond yields go negative for the first time.
Mohamed El-Erian, chief economic adviser at Allianz SE, said in a Bloomberg Radio interview on Monday that the world must move fast into a “whatever-it-takes policy approach that is going to be both in central banks and government agencies.”
The U.K. could be the petri dish for that theory. As the crisis has deepened, officials repeatedly stated the government and BOE would work in lockstep to respond to the threat. Incoming Governor Andrew Bailey said last week he’s had meetings with Sunak.
What Our Economists Say:
“The budget is shaping up to be a watershed moment for U.K. fiscal policy. Some emergency spending will be required as the virus shock hits, but the broader fiscal package will also help mitigate any lingering demand impacts after the epidemic passes.”
-- Dan Hanson and Jamie Rush. For the full U.K. PREVIEW, click here
“The Bank of England has made clear that they will take all necessary steps to protect financial and monetary stability,” Prime Minister Boris Johnson’s spokesman James Slack told reporters on Monday. “The government has also said that it stands ready to take further action as needed.”
In the U.S., the emergency rate cut last week failed to stem market turmoil partly because it was perceived to be acting without a corresponding move from Donald Trump‘s administration.
“Central bank action is not enough, or even the most appropriate for dealing with the economic fallout from the virus.” Paul Hollingsworth, Head of U.K. Economics at BNP Paribas. “Alongside the 25 basis-point cut in bank rate that we expect in March, fiscal policy has a key role to play.”
Sunak said Sunday that, as the front line in the battle against the virus, the National Health Service would receive the resources it needed. He also hinted that companies facing cash-flow problems would receive a break on their tax bills to help them “bridge through a difficult time.”
Barclays economists said Tuesday they expect the government to “deploy additional targeted measures to offset the negative impact of the virus outbreak on household revenues and corporate profits.”
The bank said the BOE will relaunch a program to encourage banks to lend and reversing a hike to the amount of capital banks must hold. It now expects a half-point cut in rates on March 26 at the latest, but finds “the case for an immediate cut very convincing.”
Even before the virus outbreak, the U.K. economy was struggling to grow as the outlook for the nation outside the European Union appeared uncertain.
The crisis has come at a tricky time for both the Treasury and the BOE. The new finance minister only weeks into the job, and the central bank is handing the reins from Mark Carney to Bailey. That becomes official on March 16.
Still, in Bailey, the U.K. is parachuting in a crisis veteran who helped shaped the BOE’s response in 2008. Back then, Prime Minister Gordon Brown’s rapid response in shoring up lenders helped set the tone for the global response. Following the action, Nobel Laurete Paul Krugman said Brown “defined the character of the worldwide rescue effort” prompting him to ask whether the prime minister had “saved the world financial system.”
Under Brown’s leadership, the U.K. injected funds into a number of troubled lenders to shore up the financial system -- a model that was later followed by counterparts elsewhere.
“This one will certainly feel like an emergency budget,” said Sanjay Raja, a U.K. economist at Deutsche Bank AG in London. “There’s a strong possibility” that “the MPC pulls the trigger in the coming days and announces a raft of policy measures to calm markets.”
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint
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