Bank of England Lends to the Government
The U.K. government planned to borrow directly from the Bank of England. This will ease the pressure to immediately sell bonds for the billions it needs to support the economy through COVID-19.
The FTSE 100, France’s CAC 40, and Germany’s DAX all rose 2% in stock trading on Thursday. Investors continued to hope for a turning point in the pandemic and the BOE moved to support UK government spending.
The Bank of England has previously agreed to temporarily lend money to the government to fight the spread of coronavirus.
If funds cannot be immediately raised from debt markets, lending money to the government revives a measure used in 2008. It was widely used during the financial crisis that year.
The treasury said it’s increasing the long-standing Ways and Means facility. That is a short-term overdraft that it can use to smooth its cash flow and support the functioning of markets.
There’s usually only about 400 million pounds or $500 million in the facility. But during the financial crisis, demand at one point reached almost 20 billion pounds.
Borrowing will fan speculation among investors and economists that monetary and fiscal policy makers will work more closely. This will be in order to revive their economies given interest rates are so low and state debts are surging.
Meanwhile stocks quickly lost ground with the FTSE 100 up 0.7% and the DAX was up only 0.4%. The CAC 40 had turned negative, down 0.6%.
Bank of England and the W&M Facility
In the interim, increasing the Bank of England’s Ways and Means facility by an unspecified amount was needed. Sanjay Raja, a U.K. economist at Deutsche Bank AG in London said it will be important.
It’s vital to see if this just an emergency stop-gap for the Treasury or rather a more fundamental regime shift.
The measure will provide a short-term source of additional liquidity to the government. This is if needed to smooth its cashflows and support the orderly functioning of markets, through the period of disruption.
Furthermore, the government would continue to use the markets as its main source of financing.
Its response to COVID-19 would be fully funded by additional borrowing. It will be through normal debt management operations, under which government gilts are sold to investors.
The government stressed that the use of the overdraft facility will be short term. Also, any extra borrowing would be repaid as soon as possible this year.
With that, the government has sought to reassure financial markets on the spiraling cost of COVID-19. The cost will not be met by the Treasury ordering the Bank to print money to finance its spending.
Chancellor Rishi Sunak and Bank governor, Andrew Bailey are keen to quash speculations. Concerns that the cost of the lockdown will eventually force the government into monetary financing, also known as helicopter money.
In stock market reports, US futures had been pointing higher but underwent a similar reversal. S&P 500 futures fell 0.1%. Dow Jones Industrial futures were flat, though up more than 1% earlier and Nasdaq futures were down 0.2%.
