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United Kingdom Monetary Policy March 2020

United Kingdom: BoE slashes rates and boosts bond purchases to buttress economy

In two emergency meetings in March, the BoE cut the Bank Rate from 0.75% to a record low of 0.10%, and announced it would increase its stock of investment-grade corporate bonds and UK government bonds from GBP 445 billion to GBP 645 billion. The Bank also established a special credit facility with a particular focus on SMEs to support business lending. These three measures were left unchanged at the BoE’s third meeting of the month, which ended on 25 March.

The Bank’s decision was driven by the rapid deterioration of the global and domestic economic panorama due to the coronavirus pandemic. According to the Bank: “a very sharp reduction in activity is likely. Given the severity of that disruption, there is a risk of longer-term damage to the economy.” As such, monetary easing aims to limit the extent of that damage. Moreover, the BoE’s measures were aimed at stabilizing UK financial markets, which have shown heightened instability and a tightening in financial conditions in recent weeks.

The BoE struck a dovish stance and stated it was prepared to ease policy further if required. Any further easing would likely take the form of asset purchases rather than rate cuts, given the Bank’s aversion to negative rates.

According to Adrian Paul, an economist at Goldman Sachs, the Bank’s recent moves have taken the Bank Rate “to its effective lower bound, at least for now”. However, Paul noted that they “see considerable further scope for the BoE to conduct additional Gilt purchases over time, especially in the context of greater-than-expected fiscal issuance on the part of HM Treasury.”

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