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Bank of England preview: Bank to boost bond-buying by £100bn

The Bank of England is primed to give itself at least another £100bn ($127bn) in bond-buying firepower next Thursday to try to stop the coronavirus crisis from running a wrecking ball through Britain’s economy.

The Bank slashed interest rates to an all-time low of 0.1% in March as the country went into lockdown, and has said it is weighing up whether to take interest rates below zero like some other central banks to encourage spending.

The central bank’s key rate affects the cost of personal loans, credit card rates, as well as the price of loans and bonds to large corporations and small firms.

Some economists forecast quantitative easing programme could be boosted by up to £200bn.

The meeting comes after UK’s economy shrank by 20.4% in April – the largest monthly contraction on record – as the country spent its first full month in lockdown, according to data released by the Office for National Statistics (ONS) on Friday.

UK suffers ‘historic’ contraction

A “historic” contraction is three times greater than the decline seen during the whole of the 2008 to 2009 economic downturn.

“Virtually all areas of the economy were hit, with pubs, education, health and car sales all giving the biggest contributions to this historic fall,” said Jonathan Athow, deputy national statistician for economic statistics at the ONS.

“The figures also show why it is still too early to start withdrawing policy support from the economy, despite having entered the recovery phase,” said Royal London Asset Management senior economist Melanie Baker. “The Bank of England are likely to increase asset purchases next week.”

Bank of England governor Andrew Bailey (pictured, centre) said there were “elements of recovery starting”, but added, “if there is any such thing as a normal recession … this one will be different.”

Long-term damage was also likely, as some businesses would not survive the coronavirus shutdown, even with government help, said Bailey at a virtual panel discussion hosted by the World Economic Forum last Wednesday. He added that some firms might find their business models — such as high-street stores or packed bars — no longer appealed to the public.

At the Bank’s last Monetary Policy Committee (MPC) meeting in May, Two of the nine members, Jonathan Haskel and Michael Saunders, voted for an additional £100bn to be added to the bond-buying scheme, to take the total to £745bn.

UK forecast to be hit hardest of developed nations

Since then, the US Federal Reserve and central banks around the world launched a dizzy array of bond-buying schemes and other monetary measures to keep cash flowing through businesses and households.

The European Central Bank, earlier this month, ramped up its coronavirus response by agreeing to inject an additional €600bn (£539.5bn) of emergency financial support into the eurozone economy, boosting its quantitative easing programme to €1.35tn.

The UK is forecast to be the hardest hit by health crisis among the world 19 largest economies, according to the Organisation for Economic Co-operation and Development.

Britain, which also left the European Union this year, is likely to slump by 11.5% in 2020, compared to contractions of 11.4% in France, 7.3% in the US, 6.6% in Germany and 2.6% in China, the economic group said last Wednesday.

Most economists expect the Bank to focus on bond-buying, given that the governor has said that the central bank is still developing its thinking on negative rates.

Markets look for forward guidance

AJ Bell investment director Russ Mould said: “Attention will focus on how the nine-strong committee’s votes swing when it comes to both rates and quantitative easing and whether the Bank of England leans more heavily on ‘forward guidance’”.

The Bank has already used up most of the record £200bn expansion of its asset purchase programme made in March.

Cathal Kennedy, an economist with RBC Capital Markets, expects a £200bn increase, in line with the BoE’s tendency to buy more bonds than the government plans to sell.

Larger bond-buying moves may see sterling rise following the meeting, but traders may also punish the pound is the Bank’s package is not thought to be enough to support the economy of the fifth largest nation in the world.

Such large-scale moves might revive claims that the Bank has given up its independence to finance the government’s substantial spending increases, a claim that the central bank denies.

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Roger Baird

Roger Baird is News Editor at Finixio. He has worked as a financial journalist for 20 years reporting on companies, capital markets and the UK economy.