Mark Carney has signalled that the Bank of England would be prepared to cut interest rates and allow banks to use “rainy day” funds to soften the impact of the coronavirus outbreak on the UK economy.
Giving evidence to the parliamentary Treasury committee on Tuesday, the outgoing BoE governor said the central bank’s role was “to help UK businesses and households manage through an economic shock that could prove large but will ultimately be temporary”.
“We don’t want viable businesses to go out of business because of the very necessary steps that need to be taken to protect and serve the British public,” he told the committee. “Supply disruption, as opposed to permanent impairment of supply, is important.”
He added that the monetary policy committee would need to judge how far disruptions to supply caused by the virus were affecting aggregate demand — which central banks are more able to influence.
In a clear hint that the BoE would be ready to cut interest rates, Mr Carney said disruption from the virus could hit companies’ cash flow, affect the availability of finance and hit confidence — and that it was “reasonably plausible that the demand effect would be greater than the supply effect in the near term”. He did not rule out a rate cut before the MPC’s next meeting this month.
Mr Carney also said the BoE was looking at ways of ensuring that banks could use their balance sheets as effectively as possible to lend to businesses needing working capital to stay afloat if they were affected by the spread of the virus.
This could involve allowing banks to draw down some of the countercyclical buffer, which forces them to hold more capital in good times to use in times of economic hardship, mirroring the step the BoE took after the June 2016 referendum. The countercyclical buffer is currently set at 2 per cent of banks’ total assets when adjusted for risk.
Mr Carney added that the BoE’s stress tests of the financial system had shown banks’ resilience in scenarios including economic shock emanating from China, but that it would be equally important for prudential regulators to review institutions’ practical contingency planning, including their ability to continue operating with split teams and home working.
He said the BoE would apply the same standards to its own critical functions, including payment systems, liquidity facilities and putting monetary policy into operation.
He also stressed that the BoE was in close contact with the Treasury and with other central banks around the world, saying it was “reasonable to expect a response that reflects a combination of fiscal measures and central bank initiatives.”
The economic shock of the coronavirus outbreak could be large, Mr Carney said, but in contrast with the 2008 financial crisis — which had lasting effects on the economy — “the prospect with this situation is that we will have disruption not destruction, and that should be and will be the focus of policy.”
Separately, Mr Carney was asked what the central bank was doing to tighten security after last year’s revelation that some traders had been paying for early access to an audio feed of key BoE press conferences, provided by a third party supplier.
Mr Carney said that as well as the investigation being conducted by the Financial Conduct Authority, the UK financial regulator, the BoE would report findings of an internal review of its controls and procedures in April. He said that more broadly, the BoE was working jointly with the FCA on “a host of issues around latency in markets” to establish what should be done to ensure all market participants could access information on a level playing field.
He added that following reports that a media organisation had shared market sensitive central bank material with traders before its official release, the BoE might need to opt for “maximum security” and stop sending material out under embargo. This would mean “more noise” in markets when speeches and other material was released, he said, as traders would need to react quickly to complex material.
Read more about the coronavirus impact
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