LONDON: Bank of England Governor Andrew Bailey said the British central bank has more ammunition to support the economy from its coronavirus shock, and that big, aggressive bond-buying pushes are most effective when crises strike.
“We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-COVID,” Bailey said in remarks to an online conference organised by the Federal Reserve Bank of Kansas City.
“But, hindsight is a wonderful thing when you have it.”
Bailey took over the BoE in March, just as the COVID-19 pandemic was pushing the world economy into a nosedive, and has overseen a 300 billion-pound expansion of the BoE’s bond-buying scheme and a cut in its key interest rate to a record low 0.1%.
Bailey said research by the BoE showed bond-buying by central banks was most effective at times of crisis in financial markets.
“In the decade ahead, I think we need to take on board the message the COVID crisis has reiterated, namely that our tools may be state contingent in their effects,” he said.
“And with that in mind, let’s not ignore the need to manage central bank balance sheets to enable such state contingency to take effect. There are times when we need to go big and go fast.”
The BoE has previously said negative rates are also now part of its toolbox – something Bailey reiterated on Friday – but any next move to pump more stimulus into the economy is widely expected to be a further increase in the bond-buying programme.
Britain’s economy shrank by a record 20.4% in the second quarter, the most severe contraction of any major economy.
The BoE has said the economy is likely to recover its pre-pandemic size at the end of next year. Many economists think it will take longer than that, meaning the central bank is likely to have to consider carefully its stimulus options.
Alongside Bailey’s remarks the BoE published research that sets out arguments for reversing some of its asset purchases before raising interest rates – the opposite of the BoE’s plan before Bailey took over as governor.
The working paper said the impact of quantitative easing depended heavily on the state of the economy – so it could be possible to withdraw some, creating scope for greater future action, without tightening monetary conditions as much as raising interest rates.
“If it is possible to set the appropriate stance of policy using alternative combinations of the policy rate and QE, a combination that provides more space for future QE may be preferable, other things equal,” the BoE said.
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