March 11, 2020 / 10:50 AM / 20 days ago

Breakingviews - Mark Carney’s joined-up thinking does what it can

Mark Carney, Governor of the Bank of England (BOE) speaks during a news conference at Bank Of England in London, Britain March 11, 2020.

LONDON (Reuters Breakingviews) - Mark Carney is doing nearly all he can to keep the UK economy afloat. The outgoing Bank of England boss unexpectedly eased monetary policy on Wednesday, hours before finance minister Rishi Sunak was due to unveil measures to prop up a fragile economy facing coronavirus-related disruptions. It’s rare for an independent central bank to act so openly in tandem with government, but now is not the time to stand on ceremony.

Carney, who steps down at the end of the week, cut the policy interest rate to 0.25% from 0.75%. The move came between policy meetings, like the Federal Reserve’s easing last week, and was accompanied by other steps to keep credit flowing to the economy. There was a new scheme to support lending, especially to small businesses. And the countercyclical capital buffer rate was cut to 0% of banks’ exposure to UK borrowers from 1%, which the BoE said will support up to 190 billion pounds of banks’ lending to businesses, or 13 times what net lending was worth last year.

Granted, there won’t be much appetite for new loans if the coronavirus outbreak worsens. Consumers would stay at home rather than go out to splurge so business would more likely worry how to meet scheduled payments than take on new debt. That’s where Sunak comes in. His budget later on Wednesday is expected to include complementary measures such as deferment of tax payments to help businesses cope with temporary cash flow problems and changes to sick pay rules to help more workers.

Some will carp that the central bank is jeopardising its independence by acting so overtly in concert with the Treasury. But a big package of fiscal and monetary policy measures will do more to support confidence than a series of piecemeal moves. And there’s no point sticking to business as usual when unusual shocks hit: That was how UK and euro zone central banks ended up mistakenly raising rates during the financial crisis.

Others will worry that Carney’s successor, Andrew Bailey, now has little room left to stimulate the economy if things get worse, given the central bank’s aversion to negative rates. But central bankers say that the closer they get to zero, the more reason there is to act decisively to head off bad downturns. And Bailey could always resume asset purchases. That’s one of the options open to European Central Bank Christine Lagarde at her policy meeting on Thursday. Given the gravity of the situation in Italy, whose economy was contracting even before the virus outbreak, she may manage to corral a consensus for easing. Unfortunately, she has little hope of getting the sort of fiscal help that Sunak will give his central bank.


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