(Bloomberg) --
Bank of England Governor Andrew Bailey made clear that policy makers could expand monetary stimulus as soon as next month as the U.K. faces an economic slump that could be the worst in Europe.
Two of the BOE’s 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) in a decision announced early Thursday. The rest agreed downside risks “might necessitate further monetary policy action.”
Bailey, who earlier pledged “total and unwavering commitment” to safeguard the economy during the coronavirus crisis, told reporters that the fact no action was taken this time doesn’t rule out a response soon.
“It’s about what is the appropriate response and what information, news, we think we’re going to get in the quite near future,” he said. “It would be slightly overstating it to say that there’s a bunch of us will never do any more and a couple of people who will.”
Policy makers noted that the current quantitative-easing 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 governor also said there is no distinction between having a target for QE and making an open-ended commitment, as the Federal Reserve and European Central Bank have effectively done. The BOE will “do what it takes to support the economy, consistent with the inflation target,” he said.
What Bloomberg’s Economists Say
“It’s only a matter of time before the central bank loosens again. We expect more QE to be announced in June.”
-Dan Hanson. Read his BOE REACT
The bank published a scenario for the economy based on a 14% contraction in the economy because of 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 it expects a strong rebound in 2021, the slump for this year is far sharper than the 8.3% predicted by the European Commission on Wednesday. It’s also deeper than the downturns 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 ECB 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, before giving up its gains. It was little changed at $1.2343 at 10:26 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.
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