Rishi Sunak, chancellor, will on Friday launch a massive rescue package for British companies and their workers, as the Bank of England embarked on another round of monetary easing to try to stop the coronavirus crisis spiralling out of control.
The BoE responded to the growing signs of stress in markets by announcing an emergency £200bn increase in the bonds it is prepared to own, financed by printing money. It also cut interest rates by 0.15 percentage points to 0.1 per cent, the lowest in the central bank’s 325-year history, to counter the intensifying economic crisis caused by the coronavirus outbreak.
Mr Sunak worked late into Thursday night to finalise measures to help companies retain staff through the crisis and to stop them going out of business; unions and business leaders expect the chancellor to unveil a big package of wage subsidies.
Boris Johnson tried to lift the country’s spirits, telling a press conference he hoped Britain would be through the peak of the coronavirus crisis within 12 weeks and urging companies to work with the government to avert mass unemployment. “Think very carefully before you start laying off your staff,” the prime minister said, promising new measures to support employment on Friday. “We will stand by business and I hope business will stand by its employees.”
Mr Johnson claimed that the UK could “turn the tide” on the spread of the virus by the end of June through social distancing and scientific progress, but admitted he could not say for sure that Britain would be on the “downward slope” by then.
The 12-week period envisaged by Mr Johnson as the period of maximum coronavirus disruption is in line with the kind of lifespan being discussed in the Treasury for its emergency employment support package. Mr Johnson announced the government was hoping to reach 250,000 tests a day if a new antibodies test proved successful in confirming whether individuals had suffered from the virus and recovered.
He added the government “may have to go further” in measures to enforce social distancing, particularly in London where the disease is spreading faster, but said there would be no ban on movement within — or to and from — the capital.
Meanwhile the Queen also intervened in the crisis, invoking Britain’s wartime spirit: “At times such as these, I am reminded that our nation’s history has been forged by people and communities coming together to work as one,” she said in a statement. Amid a darkening economic outlook, the BoE’s Monetary Policy Committee took the new monetary measures in a unanimous decision after a second emergency meeting noting the disruption that lay ahead.
It warned that the coming economic shock and recession “could be sharp and large, but should be temporary”. Sterling reacted favourably in the minutes that followed the BoE’s action. By mid-afternoon it rose more than 1 per cent to trade at $1.17 against the US dollar but slipped back at $1.15 by the early evening.
Commenting on the emergency move, Andrew Bailey, the bank’s new governor, said the UK was in “an absolutely unprecedented situation” with financial markets “bordering on disorderly”. He had said on Wednesday that he would consider closing markets if they became disorderly, but hoped the shock action of the central bank flooding the gilts market with £200bn would allow both gilts and sterling trading to normalise.
He admitted, however, that the UK had been at the eye of the storm in recent days, partly because its large current account deficit meant the country was reliant on financing from abroad. “One of the reasons these market moves are so powerful is [that] we have a very open economy and a large current account deficit,” Mr Bailey said.
The interest rate cut was designed to ease financial conditions along with a huge increase in quantitative easing, taking the total stock of predominantly government bonds purchased by the central bank from £435bn to £635bn. UK financial markets have been exceptionally volatile in recent days with sterling falling out of favour on international currency markets and falling to its lowest level against the US dollar in 35 years.
Part of that drop, economists said, was a rising fear of a lack of liquidity in government bond markets. The BoE’s rapid purchases aim to address that. The meeting on Thursday was the second emergency MPC meeting in eight days, with rates cut 0.5 percentage points on the morning of the Budget last Wednesday.
At the first emergency meeting, the MPC also introduced a new scheme of cheap funding for banks to help them extend cheap bridging finance to small and medium-sized enterprises. Known as the term funding scheme with special incentives for SMEs, it envisaged providing about £100bn to banks at very low rates of interest, which could underpin their lending to companies.
On Thursday, the MPC recognised that this was already too small and voted to “enlarge” it, again financed by printing money. In a letter to chancellor Rishi Sunak, Andrew Bailey, governor, requested the authority to increase QE and have any losses on the scheme indemnified by government to deal with “UK and global financial conditions have[ing] tightened”.
Approving the measures, Mr Sunak said this was part of his commitment to “take whatever further action is necessary to support the economy through the economic crisis”. Economists now, almost unanimously, expect the UK economy to dive into a deep recession this year as the country moves towards a lockdown to suppress coronavirus, destroying demand in many industries and sectors.