As we flagged, the limited new message from the BoE is that it is pausing for breath after the array of measures put in place so far this month in response to the COVID-19 threat. More pertinently, the BoE thinks it is too soon to try to gauge the ultimate impact on the economy, save to say it is will be very sharp. Instead, perhaps the crucial question it is considering is how much longer-term damage will be wrought by the direct and indirect impacts, especially if business failures and joblessness rises on a large scale.
In this regard, it is worth noting that it still has further ammunition at hand. Last week’s £200 billion extension to the previous £445 billion in its asset purchase facility is unlikely to dramatically increases the Bank’s share of outstanding gilts from the current circa-30% as the rise is likely to be mopped up by the likely increases in UK government borrowing this year.
However, there is complication in that over and beyond its asset purchase facility, the BoE considers that an additional form of quantitative easing will be accomplished by the recently-introduced Covid Corporate Financing Facility (CCFF), for which the Bank would act as the Treasury’s agent. As the CCFF will also be funded by the issuance of additional central bank reserves, the MPC will take the size of the CCFF into account when taking its decisions on assessing what should be an appropriate stock of bonds to hold.