Next BOE Governor Signals Coordinated U.K. Response to Virus

(Bloomberg) --

Incoming Bank of England Governor Andrew Bailey said the central bank will work hand-in-hand with the Treasury to help the economy withstand the fallout from the coronavirus.

Bailey said he’s already discussed how to ensure the “most effective coordination” between authorities with Chancellor of the Exchequer Rishi Sunak. The comments came as the government said next week’s budget will reflect the economic impact of the outbreak.

The comments to a committee of U.K. lawmakers are Bailey’s first to address the U.K. monetary policy outlook. They come amid mounting speculation that the BOE will follow the Federal Reserve in responding to the virus with an emergency interest-rate cut.

Bailey won’t succeed Mark Carney as governor until March 16, but he indicated he’s not in favor of cutting before gathering more evidence. Still, he said that “policy can always act in a timely manner.”

Investors are currently pricing in around a 60% chance that officials will lower borrowing costs by 50 basis points to 0.25% this month. Economists at HSBC and Nomura said the move may come imminently.

Bailey told lawmakers that some collective action may be needed to offset the impact on supply chains, which could lead to companies hitting cashflow problems. He also highlighted the range of tools at the central bank’s disposal, and said it must be nimble in the face of the virus outbreak.

“We must act in a coordinated fashion,” he said. “We can’t let our notions of independence get in the way of us.”

What Bloomberg Economists Say

“The U.K.’s economic fortunes turned a corner at the start of the year, but spillovers from China’s virus-led slowdown will weigh on the economy and a domestic coronavirus outbreak threatens a sharp shock to growth. As a result, we have lowered our near-term forecast and now expect the Bank of England to cut interest rates at its next meeting, or before if the outbreak escalates.”

--Dan Hanson and Jamie Rush

For full research note, click here

Bailey said he agreed with Carney’s view that the BOE has around 250 basis points of policy space, and the lower bound on interest rates is around 0.1%.

Deutsche Bank economists said Wednesday they expect “coordinated policy action” between the Treasury and BOE, with next week’s budget likely to include a series of emergency measures to support businesses and households.

That would then be followed by a BOE rate cut, possibly on budget day to reinforce the idea of coordination, the economists said. There may also be “targeted measures to increase liquidity” including a new Term Funding Scheme and a lowering of the countercyclical capital buffer to 0%.

Bailey’s comments on coordination are an acknowledgment of the serious threat from the outbreak, though they may raise concerns about the BOE’s operational independence. Prime Minister Boris Johnson is widely seen to have tightened his grip on the Treasury after former Chancellor Sajid Javid quit last month over the power grab.

Bailey, however, said that the BOE’s independence is not up for debate and is “preserved.”

In a written questionnaire to lawmakers, Bailey said that the bank needs to “engage in a co-ordinated way domestically that does not compromise its independence.”

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net;Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien

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