MNI INSIGHT: Income Hits May Shift Stimulus From BOE To Fiscal

--Pandemic Hit To Low Earners May Weaken Monetary Policy Transmission

--Fiscal Stimulus May Become Increasingly Important

By David Robinson

     LONDON (MNI) - The hit to lower earners from the Covid-19 crisis may make

Bank of England monetary policy less effective, posing questions for policy

makers over the extent to which further stimulus should come from fiscal policy,

MNI understands.

     While the first phase of the BOE's crisis response has been successful in

repairing malfunctioning bond markets, there is a risk the next stage, of

getting a demand-led recovery underway, will be impeded by the disproportionate

impact of the shock on the jobs and finances of lower earners.

     Traditional monetary policy, transmitted by boosting consumer demand, would

normally reflect the spending patterns of lower earners, who tend to have a

greater propensity to spend than to save. Nor are the Bank's current policy

tools designed to differentiate between different groups of earners, a task

better suited to income support.

     If the usual monetary policy channels are impaired, one option for the MPC

would be to make clear that fiscal, rather than monetary policy, would be better

placed to deliver larger amounts of stimulus.

     Ways of getting money to the lowest paid might include raising benefits or

allowances capping the amount of work permitted before benefits are cut. In the

U.S., the Treasury has sent out 159 million cheques to families and individuals,

with the support of Fed bond buying.

     --GOVERNMENT BORROWING

     Any such moves would raise uncomfortable questions over how much borrowing

the government is prepared to shoulder. But the Bank of England in March has

already approved GPB200 billion of purchases of gilts and corporate bonds,

helping to support a massive expansion of government borrowing, and is set to

top this up with fresh asset purchases in June. In case of further volatility

disrupting gilt markets, it has also extended the use of the Treasury's

overdraft account, the Ways and Means facility, which allows the government

instant access to short-term borrowing at very close to Bank Rate, currently at

0.1%

     MPC members are on record in recent months underlining the monetary policy

problem posed by the hit to the low paid, which was also highlighted this week

in a Resolution Foundation survey. Jonathan Haskel told the Treasury Select

Committee those affected by job losses would be "self-employed, young and

unskilled, (who) typically do not have many savings and often do not have access

to capital markets." Silvana Tenreyro said at an LSE seminar that the pandemic's

impact on low wage sectors "may reduce the power, or effectiveness, of looser

aggregate monetary policy."

     In August, the MPC will carry out its normal quarterly forecast round. The

spotlight will be back on traditional demand management measures if things are

running smoothly by then.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$,MFB$$$,MGB$$$]