Bailey says BoE has more firepower to combat crisis
The Bank of England has more firepower available to combat the economic impact of Covid-19, Governor Andrew Bailey said.
Bailey said the BoE could deploy negative interest rates to support the economy and that it had already broadened its approach by buying corporate bonds, given banks targeted lending incentives and bought commercial paper.
He said the BoE had used its balance sheet directly to support the economy during the Covid-19 crisis instead of largely passive functions in setting interest rates and providing liquidity to banks.
"We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid," Bailey told the annual meeting of central bankers at Jackson Hole in Wyoming. "But hindsight is a wonderful thing when you have it."
Bailey also said the Covid-19 crisis had shown the effectiveness of large, aggressive asset purchases. These may be more effective in times of acute stress, he said. That requires central banks to have "headroom" when the crisis comes, he said.
This may require unwinding of government bond purchases between crises to allow for more purchases. Another option is widening the range of assets the BoE buys though this becomes riskier for the central bank, Bailey said.
Bailey said: "We need to take on board the message the Covid crisis has reiterated, namely that our tools may be state contingent in their effects. And with that in mind, let’s not ignore the need to manage central bank balance sheets to enable such state contingency to take effect. There are times when we need to go big and go fast."