Bank of England has a transmission problem

The Bank of England meets on Thursday against the backdrop of a newly imposed lockdown that’s designed to curb the spread of the coronavirus, but will also crimp the economy. For lenders who were already nervous about borrowers being unable to pay their debts, the prospect of a second collapse in growth will prompt them to rein in their support even further.
The central bank’s most recent survey of credit conditions, conducted from September 1-18 and published in mid-October, showed lenders anticipating a surge in mortgage defaults this quarter after years of stability.
With non-essential businesses closing from this week, economists are busy trimming their estimates for UK growth in the coming three months. That will lead to higher unemployment, making consumers more apprehensive about their financial futures and mortgage lenders even more wary about the health of their lending books.
For the Bank of England, that’s a problem. It’s slashed official interest rates to a record low of 0.1% in an effort to stimulate lending and borrowing. But in the UK mortgage market, banks and building societies have steadily increased how much they charge on the most prevalent fixed-rate home loans.
For a household borrowing 90% of the value of its home, the cost of a two-year fixed mortgage has surged to 3.32%, its highest level in more than five years. So the central bank’s efforts have done nothing to ease the burden of the biggest debt carried by most consumers.
As for forecasting what will happen next to the economy, the advice for soothsayers is to rip it up and start again. The new lockdown makes growth forecasts for the fourth quarter even more of a guessing game than previously, not least because it’s far from certain that restrictions will be eased on December 2 as the UK government currently anticipates. A partial lifting in the run up to Christmas would at least allow retailers and hospitality venues to make something out of the holiday season, as opposed to facing a total washout if it is extended.
Barring moving Christmas to the spring, there is going to be another dip in the final quarter of the year, with the summer rebound becoming a distant memory. This second national shuttering is unlikely to be quite as savage as the first, which saw gross domestic product plunge 20% between April and June.
The monetary policy committee will not put much reliance on the quarterly economic assessment presented at the meeting, because not even real-time data can shed much light on how the next few months will pan out, let alone any Brexit conclusion.
The central bank is likely to add 100 billion pounds ($130 billion) to its bond-buying program, ensuring that UK gilt yields stay firmly anchored, which will help the government fund its ballooning fiscal support.

—Bloomberg