MNI PREVIEW: UK Budget May Feature Joint Action With BOE

By David Robinson

     LONDON (MNI) - The UK Treasury and the Bank of England may use Wednesday's

budget day to announce a joint package to help alleviate the economic impact of

coronavirus, including steps to provide liquidity to firms hit by supply chain

interruptions.

     Asked at a select committee hearing March 4 whether he had talked with the

Treasury head, Chancellor of the Exchequer Rishi Sunak, about action to support

business Andrew Bailey, the incoming BOE Governor stressed that any action

should be coordinated and that the central bank should not allow its

independence to impede that. He also flagged up an imminent announcement on

supply chain finance, which he said should be taken "very quickly."

     One option, as reported March 9 by MNI, would be for the BOE to accept

trade receivables, invoices that a company is yet to receive payment for, as

collateral in its liquidity operations. Other central banks have previously

carried out similar measures, and discussions on how to support supply chain

finance are ongoing at national and supranational level.

     One problem officials are trying to address is that just about 20% of

larger exporters and importers account for about 80% of trade and have easier

access to bank finance. Authorities are trying to find ways to ensure that

measures assist the other 80% of smaller companies involved in international

commerce.

     --RATE CUT SPECULATION

     Investors have speculated that the BOE might also cut its benchmark Bank

Rate on Wednesday, rather than waiting for its scheduled March 26 announcement.

But Bailey has played down the possibility of policy action outside of a regular

meeting, saying that more evidence was needed of the economic effects of the

virus outbreak, but markets have since deteriorated sharply.

     If the Bank does move, Monetary Policy Committee members have made clear

that it can at most cut by some 60 basis points and that their preference is to

avoid relying on quantitative easing, with the Bank already owning GBP435

billion of gilts and with the yield curve near flat. Departing BOE head Mark

Carney told the Treasury Committee that insofar as possible the Bank would

prefer to place policy emphasis on forward guidance and other measures rather

than asset purchases.

     Forecasts by the Office for Budget Responsibility, the body responsible for

verifying the government's fiscal arithmetic, could estimate growth this year at

something in excess of 1% and show the government on track to balance current

spending, but observers are likely to place little weight on the headline

numbers. The OBR's estimates are typically based on asset prices three to four

weeks ahead of Budget day, which are now well out of date.

     The Debt Management Office is not compelled to limit issuance to the OBR's

borrowing forecasts. It could choose to cut T-Bill issuance or, as it did in the

global financial crisis, use the crisis to justify extra debt salkes. Market

expectations for gilt issuance are in a range of GBP155 to GBP166 billion for

2020/21.

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

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