By William James and Andy Bruce
LONDON (Reuters) – The Bank of England can help spread the cost of coronavirus to society over time, Governor Andrew Bailey said on Wednesday, adding that Britain had choices to make over whether more austerity would be needed.
Britain has taken unprecedented steps to lessen the economic hit from coronavirus lockdown, including a plan to pay the wages of millions of furloughed employees – one that finance minister Rishi Sunak has said is too expensive to continue for long.
Asked if spending cuts would be necessary to restore balance to government finances, Bailey told ITV’s Peston show this was a matter for ministers but went on to say the central bank’s increased holdings of government debt created new policy options.
“What we can do, providing the overall credibility of the framework remains in place – and (BoE) independence is very important to that – is that we can help to spread over time the cost of this thing to society,” he said.
“That, to me, is important,” he added. “We have choices there and we need to exercise those choices.”
Prime Minister Boris Johnson’s government has indicated it is not in favour of returning to austerity as a way to rebalance the books following a crisis which is expected to trigger a deep downturn and create large fiscal deficit.
The finance ministry fears government borrowing this year could hit a record 337 billion pounds ($414 billion) due to the coronavirus, the Daily Telegraph reported on Tuesday, citing an internal document.
Bailey, who replaced Mark Carney as governor less than two months ago, said the latest data showed Britain was in the midst of a very sharp move into recession.
ALL CLEAR FOR MORE QE
It was now “pretty clear” that financial markets expect the BoE to further ramp up its bond-purchase stimulus plans, Bailey said.
Last week the BoE kept its benchmark interest rate at an all-time low of 0.1% and left its target for bond-buying, most of it British government debt, at 645 billion pounds.
Two of its nine policymakers – Michael Saunders and Jonathan Haskel – voted for a further 100 billion pounds of bond-buying firepower and Bailey said the BoE was ready to act again.
“The majority of us wanted to keep the option open and to put it quite clearly there, as we did. Jonathan and Michael took the view that it would be better to actually put a number on it now,” Bailey told ITV, adding that this was a “perfectly reasonable” view.
England tentatively began easing its coronavirus lockdown on Wednesday, with some people who can not do their jobs at home urged to return to work.
Bailey said it was right to be cautious about the possibility of a second peak of a disease that has killed more than 40,000 Britons.
“I think were there to be a substantial second wave, it would damage public confidence and it would then obviously rebound back into the economy,” Bailey said.
(Editing by Stephen Addison)