The Bank of England will continue with its emergency policy setting until the economy recovers from the Covid-19 slump. Governor Andrew Bailey said the Bank's decision to “act big and act fast” during the early days of the pandemic proved to be an effective response to the market panic and economic lockdown. He added that the bank's nine-strong monetary policy committee would need a “stronger-than-usual body of evidence” before it would consider removing any of the stimulus provided over the last six months.
Speaking at a virtual meet with other central bankers, Bailey said BoE would not raise interest rates or sell the assets it had purchased under its bond-buying programme, known as quantitative easing, until there was “significant progress” in eliminating the spare capacity left by the recession and inflation was raised sustainably back to its 2 per cent target.
He said, “This important step is intended to ensure monetary conditions do not tighten prematurely when there are some initial signs of an economic recovery.” He said that in order to act speedily and aggressively in the future, the bank might need to create “headroom” by selling assets back to the markets, but he stressed that it was nowhere near that point yet. The British economy contracted by 20 per cent in the second quarter of 2020, however, the gradual easing of the lockdown restrictions is anticipated to bring in a growth of about 15 per cent in the third quarter.
Bailey said Threadneedle Street had tried a range of initiatives, including buying corporate as well as government bonds and helping companies with their long-term cash flow. He said, “There are times when we need to go big and go fast. We are not out of firepower by any means, and to be honest it looks from today's vantage point that we were too cautious about our remaining firepower pre-Covid. But hindsight is a wonderful thing when you have it.”
The crisis had provided central banks with their first big test since the financial crisis of 2008. Bailey said, “Monetary policy has had to respond to an unprecedented shock. For many central banks, the main tool to date has been further quantitative easing, in unprecedented scale and pace of purchases.” The bank creates electronic money under the quantitative easing (QE), so it can buy bonds from the private sector.
“Viewed from the depth of the Covid crisis, QE worked effectively. Measuring this effect precisely is, of course, hard, since we cannot easily identify what the counterfactual would have been in the absence of QE. But QE clearly acted to break a dangerous risk of transmission from severe market stress to the macro-economy by avoiding a sharp tightening in financial conditions and thus an increase in effective interest rates.”
