Monetary Policy | |
Monetary Policy | |
1284 VIEWS | |
![]() |
Wednesday, March 11, 2020 / 10:16AM
/ By The Bank of England / Header Image Credit:
TheGuardian
The Bank's three policy committees are today announcing a comprehensive
and timely package of measures to help UK businesses and households bridge
across the economic disruption that is likely to be associated with Covid-19
The
front line of combatting the challenges of Covid-19 comprises the extraordinary
efforts of NHS health professionals, carers, and volunteers across the country,
as well as the exceptional support by the FCO to UK citizens abroad.
The Bank
of England's role is to help UK businesses and households manage through an
economic shock that could prove sharp and large, but should be temporary. The
Bank's three policy committees are today announcing a comprehensive and
timely package of measures to help UK businesses and households bridge across the
economic disruption that is likely to be associated with Covid-19. These
measures will help to keep firms in business and people in jobs and help
prevent a temporary disruption from causing longer-lasting economic harm.
Following
the spread of Covid-19, risky asset and commodity prices have fallen sharply,
and government bond yields reached all-time lows, consistent with a marked
deterioration in risk appetite and in the outlooks for global and UK growth.
Indicators of financial market uncertainty have reached extreme levels.
Although
the magnitude of the economic shock from Covid-19 is highly uncertain, activity
is likely to weaken materially in the United Kingdom over the coming months.
Temporary, but significant, disruptions to supply chains and weaker activity
could challenge cash flows and increase demand for short-term credit from
households and for working capital from companies. Such issues are likely to be
most acute for smaller businesses. This economic shock will affect both
demand and supply in the economy.
At its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%. The MPC voted unanimously for the Bank of England to introduce a new Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves. The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at 10 billion Euros. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at 435 billion Euros.
The
reduction in Bank Rate will help to support business and consumer confidence at
a difficult time, to bolster the cash flows of businesses and households, and
to reduce the cost, and to improve the availability, of finance.
When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates. In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 5% of participants' stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs). Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of 100 billion Euros in term funding.
The TFSME will:
To
support further the ability of banks to supply the credit needed to bridge a
potentially challenging period, the Financial Policy Committee (FPC) has
reduced the UK countercyclical capital buffer rate to 0% of banks' exposures to
UK borrowers with immediate effect. The rate had been 1% and had been due
to reach 2% by December 2020.
The FPC
expects to maintain the 0% rate for at least 12 months, so that any subsequent
increase would not take effect until March 2022 at the earliest.
Although
the disruption arising from Covid-19 could be sharp and large, it should be
temporary. Such economic disruption should have less of an impact on the core
banking system than recent stress tests run by the Bank have shown the system
can withstand. Those stress tests demonstrated that banks would be able
to continue to lend to businesses and households even while absorbing the
effects of substantial, prolonged economic downturns in both the UK and the
global economies, as well as falls in asset prices much larger than experienced
in recent weeks.
Given
the resilience of the core banking system, businesses and households should be
able to rely on banks to meet their need for credit to bridge through a period
of economic disruption.
The release of the countercyclical capital buffer will support up to 190 billion Euros of bank lending to businesses. That is equivalent to 13 times banks' net lending to businesses in 2019. Together with the TFSME, this means that banks should not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses and households through temporary disruption.
The FPC
and the Prudential Regulation Committee (PRC) will monitor closely the response
of banks to these measures as well as the credit conditions faced by UK
businesses and households more generally.
The
release of the countercyclical capital buffer reinforces the expectations of
the FPC and the PRC that all elements of banks' capital and liquidity buffers
can be drawn down as necessary to support the economy through this temporary
shock. In addition, the Prudential Regulation Authority (PRA) has today
set out its supervisory expectation that banks should not increase dividends or
other distributions, such as bonuses, in response to these policy
actions.
Major UK
banks are well able to withstand severe market disruption. They hold 1
trillion Euros of high-quality liquid assets, enabling them to meet their maturing
obligations for many months.
In
response to the material fall in government bond yields in recent weeks, the
PRC invites requests from insurance companies to use the flexibility in
Solvency II regulations to recalculate the transitional measures that smooth
the impact of market movements. This will support market functioning.
The Bank of England has operations in place to make loans to banks in all major
currencies on a weekly basis. Banks have pre-positioned collateral with the
Bank of England enabling them to borrow around 300 billion Euros through these
facilities.
The Bank
is coordinating its actions with those of HM Treasury in order to ensure that
our initiatives are complementary and that they will, collectively, have
maximum impact, consistent with our independent responsibilities. The Bank
continues to co-ordinate closely with international counterparts.
The
actions announced today by the three policy committees of the Bank of England
comprise a comprehensive and timely package to allow UK businesses and
households to bridge a temporarily difficult period and thereby to mitigate any
longer-lasting effects of Covid-19 on jobs, growth and the UK economy.
The Bank
will take all further necessary steps to support the UK economy and financial
system, consistent with its statutory responsibilities.
The
minutes of the special MPC meeting ending on 10 March will be published at 12
noon on 13 March 2020. The next regularly scheduled MPC meeting will end
on 25 March 2020, with the minutes of that meeting published on 26 March. The
record of the FPC meeting ending on 9 March and the next regularly scheduled
meeting on 19 March will be published together at 9.30 am on 24 March 2020.
Related
Links #Coronavirus
1.
COVID-19: The Wealth and Health of
Nations
2.
The Oil Price War Has Only Just Begun - OIR 100320
3.
Massive Supply Overhang to Keep Crude Prices Subdued
4.
The World's Most Powerful Oil Alliance Is Falling
Apart - OIR 060320
5.
Oil Prices Rebound As Central Banks Intervene - OIR
030220
6.
Oil Extends Gains as Hopes of Stimulus, OPEC Cuts
Offset Virus
7.
Coronavirus Meltdown Continues As Brent Breaks $50 -
OIR 280220
8.
President Buhari Appoints SGF Boss Mustapha As
Chairman Of Presidential Task Force On Coronavirus
9.
Coronavirus: How Nations Tackle The Disease As The
Global Economy Slows Down
10. Coronavirus: IsDB President Calls For Coordinated
Efforts To Tackle Pandemic
11. FG Inter-Ministerial Meeting Reviews Strategies On
Containing Coronavirus
12. Arbitrary Increase in Prices of Protective and Hygiene
Products on Account of Coronavirus Concerns
13.
COVID-19: When It Rains, It Pours - LBS Executive Breakfast Session -
March 2020
14.
World Bank Group Announces Up to $12bn Immediate
Support for COVID-19 Country Response
15.
China's Official Manufacturing Index Crashed from 50.0 to a Record Low
of 35.7 In February 2020
16.
Coronanomics: Understanding The Darker Side of A Virus's Economic
Downside
17.
Coronavirus: Establishing The Nexus Between A Bug and Global Equity
Markets
18.
Coronavirus: Africa Braces for the Economic Impact of China Slump
19.
COVID-19 Refinancing Risk Elevated for 6% of Rated China Corps
20.
Global Ports Vulnerable to Coronavirus-Related Volume Declines
21.
Coronavirus May Add to Liquidity Strain for Some APAC Corporates
22.
Coronavirus Set to Dampen China's Economic Growth
Related News
1.
Bank's Lending Rates Decline Albeit Slower Than Expected
2.
The Policy Wave in the Nigerian Banking sector: A Poison or a Pill?
3.
The Rationale for the Hike in the CRR
4.
Bankers' Committee to Partner FG on Bridging Infrastructure Deficit
5.
Loan Book Expansion in Double Digits
6.
Effects of Maturing OMO Bills
7.
Personal Statements by The MPC Members At The 128 MPC Meeting of Jan
23-24, 2020
8.
Aggregate Private Sector Credit Increased By N2.05trn Over H2 2019 -
NOVA
9.
New Cash Reserve Requirement Credit-Negative for Nigerian Banks
10. MPC Resumes Tightening by Raising CRR by 5%
11. Interest Rates Jump in Response to CRR Hike
12. Monetary Policy Review - A Means to an End