BOE to combat new lockdown pain with fresh stimulus aid

Bloomberg

The Bank of England (BOE) looks certain to unleash another burst of monetary stimulus this week as new coronavirus lockdowns shock the economy
and put yet more pressure on government finances.
Any doubt that Governor Andrew Bailey and his colleagues might delay boosting their bond-buying program when they meet this week was effectively erased with Prime Minister Boris Johnson’s announcement of a month-long closure of non-essential shops and hospitality venues in England.
In a survey last week, economists predicted the BOE will increase quantitative easing by 100 billion pounds ($129 billion) to 845 billion pounds. That’s almost double the level at the start of the year, and would be the fourth round of monetary easing since the crisis started.
The decision is scheduled to be published alongside updated economic forecasts at midday on Thursday, the same day the new lockdown kicks in. The QE boost could now be bigger than expected, and an earlier announcement can’t be ruled out.
The central bank faces a communications challenge though as much of its Monetary Policy Report will already have been written, assuming milder restrictions with a lockdown as a secondary scenario. “There will be some very last-minute rewriting of the document, to say the least,” Rossiter said.
The new lockdown could also bolster talk of negative interest rates — a topic BOE is discussing but which economists in the
survey didn’t see as imminent.
“It ramps up the pressure somewhat on the skeptics of negative rates to reconsider, and increases the probability they will go there,” said Tony Yates, an economics lecturer and former BOE official.
The stay-at-home order — which the government has acknowledged could be extended — comes at an especially tough time for the UK. A December 31 deadline to agree a trade deal with the European Union is fast approaching, causing extra uncertainty and the prospect of tariffs on imports from next year.
Even before the lockdown development, economists expected the BOE to slash its growth outlook for this year and next on Thursday. Amid the deteriorating situation, a number of policy makers had already signaled they were ready to add more stimulus.
“The risk is that they could up weekly pace of QE which would then require a larger envelope than the 100 billion pounds we are forecasting if they want to continue purchases for a decent length of time,” said George Buckley, chief UK economist at Nomura International Plc.
Bond purchases, the BOE’s preferred tool so far, have almost exactly matched the massive increase in government borrowing needed to fund Chancellor of the Exchequer Rishi Sunak’s
crisis response.
Debt levels are now set to rise further, with Johnson saying the government will extend its furlough plan.
The new strategy means furloughed workers will get as much as 80% of their wages through the lockdown. The government will take on the full burden of that support, which for the last month had included a contribution of up to 20% from businesses.
The latest lockdown isn’t expected to hit the economy as severely as the first one earlier this year. That caused a 20% contraction in output in the second quarter, for the worst recession in more than three centuries.
This four-week imposition of slightly less stringent curbs could knock 5% off gross domestic product this quarter, according to Simon French, chief economist at Panmure Gordon & Co. and a former Chief of Staff to the UK Cabinet Office.