MNI INTERVIEW: Ex-BOE's Bean Says Term Funding Key To Easing

By David Robinson

     LONDON (MNI) - Former Bank of England Deputy Governor Sir Charles Bean told

MNI that the BOE's 50-basis-point rate cut last week was largely for show with

the key part of the stimulus package being targeted low-cost funding and easing

of bank capital requirements.

     In addition to a cut in Bank Rate to 0.25%, the BOE's package included a

Term Funding Scheme, providing funding at rates at, or very close to the

benchmark rate, with incentives to get banks to lend to smaller firms. Banks'

countercyclical capital buffer was reduced to zero.

     "What we need at the current juncture," said Bean, one of the top officials

at the Office for Budget Responsibility, "is about bridging over this period.

There are going to be interruptions to supply because people can't get the

workers, there are going to be interruptions to demand and perfectly sound

businesses are going to find that they have got a cashflow problem."

     "What you don't want is them going under simply because they have got this

short-run problem, so giving them access to funding. It is exactly analogous to

having a lender of last resort. Banks get into trouble they go to the central

bank. Here you want to make sure that businesses can get that short-term

financing easily," Bean said.

     --HEADLINE GRABBING

     But rate reductions from such low levels make little difference, he said,

although they do have the virtue of being a headline-grabbing item on mainstream

national news, which might ignore more technical central bank measures.

     "I don't think the cut in Bank Rate is likely have very much useful effect.

This [the coronavirus hit] is a short-run demand and supply effect," Bean said,

talking to MNI after the UK's March 11 Budget.

     "It has communication value. So the optics might benefit from the Bank

Rate. But that said the Fed cut by 50bps, there was a short-term sugar rush and

then equities started falling."

     The Monetary Policy Committee only has scope to cut Bank Rate a further 15

basis points before it hits 0.1%, the level it deems to be the effective lower

bound.

     Bean had taken the view before the coronavirus hit that the already planned

Budget stimulus package and the economic outlook meant a rate cut was not

justified. The OBR forecast in its Economic and Fiscal Outlook, which did not

incorporate coronavirus effects, that Bank Rate would stay at 0.75% throughout

the forecast period.

     "At the time I thought these were not the circumstances to be cutting

rates. It wasn't obvious the economy needed it and we had a budget coming up

where there was already an expectation that it would be expansionary," Bean

said.

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

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