respond to the economic shock from Covid-19 | My Assignment Tutor

Bank of England measuresto respond to the economicshock from Covid-19i The Bank’s three policy committees announced a comprehensive and timely package ofmeasures to help UK businesses and households bridge across the economic disruption thatis likely to be associated with Covid-19Bank of England measures to respond to the economic shock from Covid‐19 | Bank of England Page 1Published on 11 March 2020The front line of combatting the challenges of Covid-19 comprises the extraordinary efforts of NHS healthprofessionals, carers, and volunteers across the country, as well as the exceptional support by the FCO to UKcitizens abroad.The Bank of England’s role is to help UK businesses and households manage through an economic shock thatcould prove sharp and large, but should be temporary. The Bank’s three policy committees are today announcing acomprehensive and timely package of measures to help UK businesses and households bridge across the economicdisruption that is likely to be associated with Covid-19. These measures will help to keep firms in business andpeople in jobs and help prevent a temporary disruption from causing longer-lasting economic harm.Following the spread of Covid-19, risky asset and commodity prices have fallen sharply, and government bond yieldsreached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and UKgrowth. Indicators of financial market uncertainty have reached extreme levels.Although the magnitude of the economic shock from Covid-19 is highly uncertain, activity is likely to weakenmaterially in the United Kingdom over the coming months. Temporary, but significant, disruptions to supply chainsand weaker activity could challenge cash flows and increase demand for short-term credit from households and forworking capital from companies. Such issues are likely to be most acute for smaller businesses. This economicshock will affect both demand and supply in the economy.MPC reduces Bank Rate and launches new Term FundingScheme with additional incentives for SMEsAt its special meeting ending on 10 March 2020, the Monetary Policy Committee (MPC) voted unanimously toreduce Bank Rate by 50 basis points to 0.25%. The MPC voted unanimously for the Bank of England to introduce anew Term Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME), financed bythe issuance of central bank reserves. The MPC voted unanimously to maintain the stock of sterling non-financialinvestment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. TheCommittee also voted unanimously to maintain the stock of UK government bond purchases, financed by theissuance of central bank reserves, at £435 billion.The reduction in Bank Rate will help to support business and consumer confidence at a difficult time, to bolster thecash flows of businesses and households, and to reduce the cost, and to improve the availability, of finance.When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit ratesmuch further, which in turn could limit their ability to cut their lending rates. In order to mitigate these pressures andmaximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of atleast 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additionalfunding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs).Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of£100 billion in term funding.The TFSME will:help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses andhouseholds benefit from the MPC’s actions;provide participants with a cost-effective source of funding to support additional lending to the real economy,Bank of England measures to respond to the economic shock from Covid‐19 | Bank of England Page 2providing insurance against adverse conditions in bank funding markets;incentivise banks to provide credit to businesses and households to bridge through a period of economicdisruption; andprovide additional incentives for banks to support lending to SMEs that typically bear the brunt of contractions inthe supply of credit during periods of heightened risk aversion and economic downturns.FPC releases the UK Countercyclical Capital BufferTo support further the ability of banks to supply the credit needed to bridge a potentially challenging period, theFinancial Policy Committee (FPC) has reduced the UK countercyclical capital buffer rate to 0% of banks’ exposuresto UK borrowers with immediate effect. The rate had been 1% and had been due to reach 2% by December 2020.The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not takeeffect until March 2022 at the earliest.Although the disruption arising from Covid-19 could be sharp and large, it should be temporary. Such economicdisruption should have less of an impact on the core banking system than recent stress tests run by the Bank haveshown the system can withstand. Those stress tests demonstrated that banks would be able to continue to lend tobusinesses and households even while absorbing the effects of substantial, prolonged economic downturns in boththe UK and the global economies, as well as falls in asset prices much larger than experienced in recent weeks.Given the resilience of the core banking system, businesses and households should be able to rely on banks tomeet their need for credit to bridge through a period of economic disruption.The release of the countercyclical capital buffer will support up to £190 billion of bank lending to businesses. That isequivalent to 13 times banks’ net lending to businesses in 2019. Together with the TFSME, this means that banksshould not face obstacles to supplying credit to the UK economy and to meeting the needs of businesses andhouseholds through temporary disruption.The FPC and the Prudential Regulation Committee (PRC) will monitor closely the response of banks to thesemeasures as well as the credit conditions faced by UK businesses and households more generally.PRC issues Supervisory GuidanceThe release of the countercyclical capital buffer reinforces the expectations of the FPC and the PRC that allelements of banks’ capital and liquidity buffers can be drawn down as necessary to support the economy throughthis temporary shock. In addition, the Prudential Regulation Authority (PRA) has today set out its supervisoryexpectation that banks should not increase dividends or other distributions, such as bonuses, in response to thesepolicy actions.Major UK banks are well able to withstand severe market disruption. They hold £1 trillion of high-quality liquidassets, enabling them to meet their maturing obligations for many months.In response to the material fall in government bond yields in recent weeks, the PRC invites requests from insurancecompanies to use the flexibility in Solvency II regulations to recalculate the transitional measures that smooth theimpact of market movements. This will support market functioning.The Bank of England has operations in place to make loans to banks in all major currencies on a weekly basis.Banks have pre-positioned collateral with the Bank of England enabling them to borrow around £300 billion throughthese facilities.Bank of England measures to respond to the economic shock from Covid‐19 | Bank of England Page 3The Bank is coordinating its actions with those of HM Treasury in order to ensure that our initiatives arecomplementary and that they will, collectively, have maximum impact, consistent with our independentresponsibilities. The Bank continues to co-ordinate closely with international counterparts.The actions announced today by the three policy committees of the Bank of England comprise a comprehensive andtimely package to allow UK businesses and households to bridge a temporarily difficult period and thereby tomitigate any longer-lasting effects of Covid-19 on jobs, growth and the UK economy.The Bank will take all further necessary steps to support the UK economy and financial system, consistent with itsstatutory responsibilities.The minutes of the special MPC meeting ending on 10 March will be published at 12 noon on 13 March 2020. Thenext regularly scheduled MPC meeting will end on 25 March 2020, with the minutes of that meeting published on 26March. The record of the FPC meeting ending on 9 March and the next regularly scheduled meeting on 19 March willbe published together at 9.30 am on 24 March 2020.Bank of England measures to respond to the economic shock from Covid‐19 | Bank of England Page 4


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