Bank of England Signals Its Support to Buy More Bond If Needed

Bank of England has warned the risk of longer-term damage to the economy due to the severe financial disruption caused by the spread of Covid-19. The Central Bank expects global GDP to fall sharply during the first half of this year as the virus has spread to more than 180 countries; though, there still is not enough evidence of the precise magnitude of the economic shock from the coronavirus crisis.

Prime Minister Boris Johnson announced a police-enforced lockdown in the United Kingdom (UK) on Monday, 23 March 2020, for coronavirus containment. Many consumer-facing companies had to cease their operations temporarily, while other business also was required to scale back their activities and shut down for a time.

• Bank of England ready to purchase more bonds

In an environment of heightened uncertainty, the British government announced a series of fiscal measures to offer substantial support to businesses and households. The Monetary Policy Committee (MPC) slashed the base rate by 65 basis points to keep it to all-time low level at 0.1% and increased its quantitative easing stimulus package in response to calm the panic in financial markets over the coronavirus outbreak.

The Bank of England also took a decision to increase its bond purchase programme by £200 billion to a total of £645 billion, financially backed by the issuance of central bank reserves. It reportedly includes a purchase of UK government bonds and investment-grade corporate bond under a quantitative easing programme designed to limit the cost of borrowing and inject cash into the economy.

In the latest MPC meeting held on Thursday, 25 March 2020, the committee voted unanimously to maintain the base rate at 0.1% as well as agreed to continue with the bond-purchase programme of £200 billion to take the total stock of asset purchases to £645 billion.

Bank of England stated that if needed, asset purchase can be expanded further to help restrict coronavirus impact. Experts are also of the view that BoE by May this year, will be going for more bond-buying, based on the gravity of the coronavirus impact on the economy.

These purchases are aimed at stimulating investment activity by lowering corporate bond yield which reduces firms’ borrowing costs and stimulates new issuance. Similarly, it was observed that the government bonds yield fell significantly following the announcement of additional purchase in the previous MPC meeting.

• Inflation Targets and Current Developments

The Bank of England maintains its monetary policy target to meet the 2 per cent of the inflation rate, determined by the 12-month increase in the CPI (Consumer Prices Index).

However, CPI inflation was noted at 1.7% in February 2020. And prior to recent economic shocks, the market already expected inflation to fall below the MPC’s 2% target due to a large number of business failures and persistent rises in unemployment. The composite flash output also declined sharply in March in line with material contraction in the UK GDP.

It is now expected that the inflation rate would fall below 1% in the spring, reflecting the recent crash in oil prices, which have fallen more than 60% since the start of this year.

• How ugly could it get?

Coronavirus has taken the entire world by storm, and its speed and breadth spread has devastated the globe as more than 5 hundred thousand of virus cases have been confirmed with over 27,000 deaths to date. The people are nervous about the economic collapse amid the real life-and-death struggle.

Since the scale and duration of the shock remain uncertain, the government expects a sharp cut in jobs which would eventually lead to a drastic decline in household spending on social activities and other forms of consumption. The regulatory body also estimates export to weaken and businesses to postpone their investment decisions amid economic meltdown.

All the major central banks around the world have stepped up their efforts to contain the coronavirus outbreak through wide-ranging policy responses to help stabilise markets. The Governments have been announcing substantial stimulus packages, funding for medical infrastructure accompanied by central banks’ rate cuts. Further, the markets expect to see the drop-in economic activities to be partially offset by higher spending on essential goods for some time.

However, the fears of recessions continue to be looming large! Some market participants predict that the situation could be worse than the Black Monday crash of 1987.

• How is the needle moving in the stock market?

On Friday, 27 March 2020, the benchmark FTSE 100 after two days of recovery slumped again, dropping 305.40 points or 5.25% to close at 5,510.33. Whereas, FTSE 250 declined by 610.91 points or 3.97% to stand at 14,769.80, and FTSE 350 was down 162.82 points or 5.05% to 3,063.70 as on 27 March 2020. Markets, which were in euphoric mood after the massive stimulus announcements from the US, seems to be reacting to the tweet coming from Prime Minister Boris Johnson that he has tested positive for coronavirus. Mr Johnson confirmed that he is now self-isolating and is working from home, thanking the wizardry of modern technology.

The currency market also witnessed a slight sombreness on Friday, 27 March 2020, as the Pound-to-Dollar exchange rate declined by 0.03% to stand at 1.2452 while Pound-to-Euro exchange pair edged lower by 0.03% to reach 1.1174.

• Coronavirus Deaths and Confirmed Cases Statistics

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Meanwhile, in the UK the number of coronavirus cases increased to 9,533, which includes many high-profile dignitaries including Prince Charles (son of Elizabeth II) and now Prime Minister Boris Johnson. The death toll has increased to 578 in the UK as on 28 March 2020.

In Italy, the number of confirmed cases has been reported to be 80,509 with the total over 8,100 deaths from COVID-19 as on 28 March 2020 (Source: WHO Dashboard). Italy ranks second in terms of the total number of confirmed cases after China (the epicentre of coronavirus outbreak), which is on top with 82,093 cases reported to date. The number of deaths in the United States of America has increased to 991, with a total 68,334 cases reported to date. In Spain and Germany, the number of confirmed cases is reported at 56,188 and 42,288, while the total number of deaths have been 4,089 and 253, respectively.