By William Schomberg
LONDON (Reuters) – The Bank of England will not resort to irreversibly printing money in order to fund a surge in government spending as it tries to shield Britain’s economy from the coronavirus crisis, its governor Andrew Bailey said on Sunday.
The BoE last month ramped up its bond-buying programme by a record 200 billion pounds ($245.2 billion), similar to moves by the Federal Reserve and the European Central Bank as central banks around the world scrambled to limit a deep recession.
The next day, finance minister Rishi Sunak announced the British state would pay 80% of the wages of workers who are temporarily laid off by companies, in the hope of getting them back into work quickly when the crisis abates.
That historic step was part of a series of emergency measures that will cost the government at least 60 billion pounds at a time when it will also suffer a plunge in tax revenues.
Bailey, acknowledging that the world faced a “time of great uncertainty”, said he would oppose any calls for the BoE to print money simply to help the government.
“Using monetary financing would damage credibility on controlling inflation by eroding operational independence,” Bailey said in an opinion piece published by the Financial Times.
“It would also ultimately result in an unsustainable central bank balance sheet and is incompatible with the pursuit of an inflation target by an independent central bank.”
When the BoE announced the expansion of its bond purchase plan to 645 billion pounds on March 19 – most of it for government bonds – Bailey stressed he was not abandoning the long-standing concerns of central bankers about monetary financing “because history tells us where that leads”.
The idea of central banks helping governments to spend more has raised concerns about a rise in inflation in the future. It has even drawn parallels with the disastrous hyperinflation of 1930s Germany and 1990s Zimbabwe.
In his article for the FT, Bailey said the BoE remained in full control of how and when the expansion of its reserves to buy bonds is unwound, and that the central bank would not allow its 2% inflation target to be threatened.
“If the recent expansion of bond buying appears to threaten that goal, the MPC (Monetary Policy Committee) can react,” he said, adding the BoE had clear operational independence even as it worked with the government to support the economy.
“The BoE will not hesitate to take all necessary actions both to support British businesses and households through this period of uncertainty and to ensure inflation is consistent with the 2% target in the medium term,” he said.
(Writing by William Schomberg; Editing by Jan Harvey)
