Bank of England offers unlimited QE for large company financing
The new Bank of England governor, Andrew Bailey, said on Wednesday that the UK central bank was willing to pump unlimited quantities of money into the economy via its new commercial paper facility to help fight the effects of the coronavirus — and would go further if requested to by the government.
Speaking to journalists on a conference call from Threadneedle Street, Mr Bailey, who took over from Mark Carney at midnight on Monday, said the bank’s ambition was to ensure the virus had a “disruptive”, rather than “destructive”, impact on the economy.
He warned that the situation was serious but added that it was not yet time to shut financial markets because they had not lost their integrity and their ability to price. “I don’t think we’re there at all,” Mr Bailey said.
Sterling’s rapid descent to below $1.19 on Wednesday — a level it has not consistently traded at since the 1980s — was not something he could not explain easily, he admitted, but he said the Monetary Policy Committee would take it into account at its meeting next week.
The BoE governor was keen to clarify the details of the commercial paper facility, announced by Rishi Sunak, the chancellor, on Tuesday. He said that over the weekend it had become clear that large companies, as well as small ones, were running short of cash and needed facilities to borrow quickly and cheaply.
He said the commercial paper facility, in which the BoE would print money and use it to lend directly to large companies that issued new short-term bonds, would be up and running by the start of next week.
The BoE would be indemnified by the government for the risk of these loans and Mr Bailey said the facility was potentially unlimited in size. “We didn’t put a limit on it . . . we didn’t announce it was ‘X’ because the reason for that is we don’t know.”
By making it clear that companies can issue new commercial paper directly to the BoE and have it financed by newly issued sterling, the facility is in effect an unlimited form of quantitative easing.
This will potentially greatly increase the amount of excess reserves in the financial system and take pressure off banks to lend. The BoE was open to the idea of extending the facility to commercial paper backed by assets as well as companies, Mr Bailey added.
Saying the aim of the government and the BoE moves was to limit the damage to the economy, Mr Bailey said the central bank was not yet working from any reliable economic forecasts although its regional agents were seeing signs of financial stress across the country.
“Please don’t think we’re sitting on an economic forecast that tells you what is going to happen,” he said. “We’ve got all sorts of charts with ‘Vs’ on them” representing the economy, he added.
But he wanted to reassure people that the BoE would do whatever it took to keep markets operating effectively and would support the government when it undertook expensive measures to support the economy, businesses and households during the coronavirus outbreak.
He did not rule out creating money to finance government projects, something that is possible because the BoE is the government’s banker, but said the situation did not yet warrant such a move. “I don’t think at the moment we’re facing an inability of the government to fund itself,” he said.
Helicopter money, in which the central bank financed government spending directly, especially if it wanted to send cheques to every household, was a matter for the chancellor, he said.
With the BoE having used up most of its fuel it normally uses to fight an economic downturn, Mr Bailey said it was now looking to create more tools and the commercial paper facility was an example of that to increase the capacity of the central bank to act. “We have to look at the size of the tank,” he said.