MNI POLICY (UPDATE): BOE May Provide Supply Chain Finance

By David Robinson

     LONDON (MNI) - The Bank of England is likely to provide financing to firms

hit by supply-chain disruption in the near future, Andrew Bailey, governor

designate of the Bank of England, said on Wednesday.

     Bailey, giving evidence to the Treasury Committee, stressed that the MPC

was working alongside the Treasury on developing its response to coronavirus,

although he indicated he did not favour immediate BOE action.

     The following are key points from the evidence Bailey, who is currently

Chief Executive of the regulatory body the Financial Conduct Authority (FCA),

gave. He takes over as head of the BOE from the middle of this month.

     --Asked whether he favoured a rate cut before the end March meeting Bailey

made the case against immediate action.

     "I think what we need is more evidence than we have at the moment as to how

exactly this (the coronavirus) is feeding through."

     The Bank "is working extremely hard on it, I have been engaged in it this

week and I think then we can reach that judgement."

     He also argued against setting a negative interest rate because of its

harmful effect on banks' net interest margin.

     --While the external focus on the Bank has all been about monetary policy,

and the possibility of an emergency rate cut, Bailey stressed it had multiple

tools at its disposal.

     "I think it is quite reasonable to expect that .. collectively we are going

to have to provide some form of supply chain finance in the not very distant

future," Bailey said.

     The aim of this finance would be to ensure that businesses, particularly

smaller firms, are not damaged by the spread of the virus. Bailey was not pushed

on what precise form this financing could take.

     --There has been speculation in markets that the BOE Monetary Policy

Committee will opt to cut Bank Rate before its regular month meeting which is

scheduled for March 26. BOE Governor Mark Carney, however, in comments to the

TSC Tuesday refused to tie the MPC down to an early rate decision.

     --Coronavirus "is going to be the first and most pressing issue that we

face. It is evolving very quickly and it is evolving in many ways in an

unexpected and unprecedented fashion. So we have to be very nimble," Bailey

said.

     --In his written answers on monetary policy, Bailey expressed no clear

disagreements with the published central views and analysis of the MPC.

     "I concur with the MPC's view that since the referendum Brexit-related

uncertainty has dampened investment growth, which in turn will have affected

productivity growth negatively due to weaker capital deepening," he said.

     He added that it was reasonable for the Bank to estimate that R*, the

interest rate level that their neither accelerates nor retards growth, had

fallen to around 2-3% in nominal terms.

     He backed the use of quantitative easing, saying it has been "a very

necessary thing."

     -Asked if the MPC had enough monetary policy room to counteract economic

shocks, he noted without criticism Carney's judgement that the Bank has the

equivalent of around 200-250 basis points of easing and he said that this was

"uncomfortably close" to the amount required to deal with a typical downturn.

     In light of this fiscal policy may have to do some of the heavy lifting

bolstering demand.

     The long run decline in equilibrium interest rates "has challenged the

pre-crisis consensus that monetary policy always dominates fiscal policy as a

demand management tool," Bailey said in one written answer.

     --The Treasury committee hearing was a confirmatory one on Bailey's

suitability to be BOE head. The cross-party committee has no legal power to

block him but will make a recommendation as to whether he is suitable.

     The vast majority of the questioning to Bailey was over the FCA's perceived

shortcomings in handling various financial scandals, from short-selling through

to its handling of the HBOS' corporate banking fraud case.

     Bailey said that while he was proud of what the FCA has achieved he was not

proud of some of the things that had happened during his time there.

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

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