MNI REVIEW: UK In Coordinated Fiscal Stimulus And Rate Cut

By David Robinson

     LONDON (MNI) - The Bank of England and the UK Treasury delivered a

coordinated response to the coronavirus shock Wednesday, with fiscal stimulus

equivalent to around 1.5% of GDP and a 50-basis-point rate cut combining with a

roughly GBP100 billion targeted Term Funding scheme and a reduction in banks'

regulatory countercyclical capital buffer to zero.

     BOE Governor Mark Carney and incoming Governor Andrew Bailey made clear at

their press conference that the Bank still has ammunition in reserve, which

Bailey estimated at the equivalent of 125 basis points, some of which it could

deploy at its meeting later his month, with the announcement due on March 26.

The Bank steered clear of quantitative easing, did not deploy forward guidance

and could still conjure up other measures.

     Carney, who leaves his post on March 16, stressed that the Bank can do more

if required.

     "The MPC is in a position where ... it has room on all of its policy

instruments if it so chooses. And it has regularly scheduled meetings and it

will take those decisions at the appropriate time," he said.

     With gilt yield curves so flat, with the BOE already holding GBP435 billion

of gilts and with monetary policy committee members having said that Bank Rate

was, initially, the preferred policy tool, it was unsurprising that asset

purchases did not form part of Wednesday's package.

     The new lending scheme is a variant of the existing Term Funding Scheme,

designed to ensure that banks do not see lending margins squeezed as a result of

the Bank Rate cut, with an additional incentive to provide extra funds if they

boost lending.

     --GBP FISCAL BOOST

     In parliament, the Treasury's head, Chancellor of the Exchequer Rishi

Sunak, also cleared space for more measures if required to add to the GBP30

billion in stimulus included in his first budget.

     There had been speculation that he would scrap or amend fiscal rules

included in the governing Conservative Party's election manifesto, which require

the budget to be balanced in three years' time and investment spending not to

exceed 3% of GDP, but he stuck to them, as MNI reported that he was likely to.

     "Today's budget delivered within the fiscal rules with room to spare," he

said, with fiscal space of nearly GBP12 billion in the target year of 2022-23

for balancing the current budget.

     "Even within our current framework, I have the flexibility to act as

required over the next two years."

     The public finances only meet those rules because of a large caveat, that

the Office for Budget Responsibility did not have time to factor in last-minute

measures adopted to combat the coronavirus. There will, however, be another

budget in the autumn and Sunak announced he would review the fiscal rules, which

may well provide him with more leeway.

     Asked by MNI about the extent of the rate cut, to 0.25% rather than the

0.1% the BOE believes to be the effective lower bound, the BOE's Carney focussed

instead on the sheer scale of the overall stimulus package.

     "This is a big package. It is a big deal, the cut in the [countercyclical

buffer] by as much as the FPC (Financial Policy Committee) did. There is a huge

term funding certainty for the financial sector, GBP100 billion at Bank Rate

with additional incentives, and could be substantially increased depending on

the lending path of the economy," he said.

     UK policymakers have chosen to act together fairly early in the crisis,

while stressing that they have more ammunition to fire if required.

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

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