Bank of England and UK Government set to coordinate efforts to rescue the economy

Both the Bank of England and the British government have now braced up to take drastic measures to fight the threat of the pandemic from causing deeper incursions into the British economy. After a series of rate cuts and loan refinancing measures taken over the last fortnight, the realization has now come to set in that far stronger measures would have to be taken to pull the country out of this crisis. The situation on the ground level, however, is far more tentative with the country in complete lockdown and authorities working on ways and means to make provisions available to people at their doorsteps. The markets, however, have been faring well during the last two days, after two weeks of severe battering and billions of pounds worth of value erosion.

The British government has started to treat this pandemic as a wartime emergency. It has started to institute wartime measures like giving authorities wide-ranging powers to ensure compliance with the quarantine protocols. With almost all private establishments shut, there is very little that businesses can achieve as far as maintaining an adequate level of economic activity is concerned. Under such circumstances, the chances of a longer-term slowdown gripping the country are very real. The Bank of England which has already lowered its interest rates to 0.1 per cent is highly unlikely to take it down further into negative territory, thereby inching towards for other quantitative measures like debt repurchase and other forms of quantitive easing. On 18^th of this month, the government did avail of this option with the Bank of England. It announced that it would be providing guarantees to business loans worth £350 billion of large businesses which will help them pay for their bills and employee salaries. At the same time, the pandemic continues to rage over the next few months.

Prior to that, in this month at the time of presentation of the Budget, the British government had also announced a significant number of other measures to deal with the pandemic which at that time had not reached such massive proportions. The Chancellor of the Exchequer, Rishi Sunak, had allocated £30 billion in stimulus for small and medium-sized businesses to be delivered mostly in the form of direct transfers to employees of these businesses who would not be able to attend workplaces due to the lockdown. Other than that, the government also announced a massive public investment drive totalling nearly £640 billion to be spent on providing schools, hospitals roads, railways, power networks and communications across the country by the year 2024-25 which has the potential to create massive employment opportunities in the country.

Similar measures are also being adopted in other countries of the world as well. The United States, which also saw its bank rates being eased down to historic lows over the past two weeks, was backed up by a massive stimulus package of $2 trillion. Last week the European central bank also announced a mega bond repurchase programme of a whopping €750 billion to prop up the business sentiments in continental Europe which at this time is the epicentre of the pandemic and is severely battered by it. Elsewhere, Japan, Australia, India and several other countries have also declared hefty stimulus packages to deal with the economic blow that this pandemic is set to deliver over its course. In Italy, the government has allowed citizens to defer payment of certain utility bills on account of lockdown conditions and in some cases has even forgone some of the taxes owed.

Not only the government, the private sector institutions have also started to contribute towards this fight. Banks and financial institutions in the United Kingdom have decided to allow their customers mortgage payment holidays in the midst of businesses which have been impacted due to the drastic fall in demand due to the lockdown. British retailing companies have also come together to pool their resources to deliver provisions to people at their homes as the lockdown measures make it difficult for them to move out of their residences.

These measures, however, may not be adequate as the problem with a pandemic like this is more structural in nature than temporary mis-adjustments. In a normal economic cycle, whenever demand forces outpace supply lines or when there is a contraction in demand while supplies are at their usual extent, central banks use quantitive measures to balance out these forces so that the economy may function smoothly. In the present case, there is adequate demand. Still, it is not able to meet with supply due to logistical problems and not due to lesser production or any other problem with production-related infrastructure. Thus addressing this logistical problem is paramount to the resolution of this economic crisis. At the core of this logistical problem is the restriction on the movement of people. Most of the transportation services in the world be it aircraft, trains or buses have been severely restricted except for the most essential services; even personal vehicle movement on roads and pedestrians are being discouraged from stepping out of their homes due to the fear of community transmission. Until and unless this situation is addressed and the restrictions removed, the logistical problem is going to remain as it is. Several business activities that can be conducted remotely from home are being encouraged and are also doing their bit in keeping up the economic activity levels. Still, their contribution is only sufficient to ensure business continuity to the minimal extent.

The capital markets have, however, been responding positively to these measures been taken by the government and the central bank in the past couple of trading sessions. Taking cues from its international counterparts, the London Stock Exchange has been performing well with good gains coming in since the declaration of the stimulus package by the US Federal Reserve was made. Investors in the country have now started value picking from the multiple-year low prices of stocks many top-performing companies amidst hopes that the British establishment will also walk the same path as the US Federal Reserve.

The success or failure of all these efforts, however, rests solely on how soon the healthcare authorities will be able to contain the spread of the virus. Already the number of cases have been soring in Europe and in the United States and every day, more and more territories across the world are getting into lockdown. The resolve of the world community to come together and put up a strong resistance to this threat is required here. Should stronger and more coordinated steps be taken soon, the economic fallout can be minimized.