Government could have effectively gone BUST if the Bank of England had not bailed it out at the start of coronavirus crisis, says governor Andrew Bailey
- Andrew Bailey said government could have gone bust without Bank stepping in
- UK borrowing soared as the coronavirus crisis took its grip around the world
- Public debt is now bigger than the country’s GDP for the first time in 57 years
- Here’s how to help people impacted by Covid-19
The government could have effectively gone bust if the Bank of England had not bailed it out at the start of the coronavirus crisis, governor Andrew Bailey said today.
Mr Bailey said chaos in the bond markets and on the exchange rates meant the Treasury could have ‘struggled to fund itself’.
The extraordinary admission comes after the Bank expanded its quantitative easing programme – printing money – to £745billion last week.
Mr Bailey reversed a policy from the era of predecessor Mark Carney this morning by saying the huge commitment could be unwound before interest rates rise significantly from their historic low of 0.1 per cent. Mr Carney had insisted that rates should be at least 1.5 per cent before the bonds are bought back.
The government has been borrowing huge sums to finance its response to the disease over recent months. Public debt is bigger than GDP for the first time in 57 years, with the state borrowing £55billion in May alone
Andrew Bailey said chaos in the bond markets and on the exchange rates meant the Treasury could have ‘struggled to fund itself’ without Bank of England action
The government was forced to borrow £55.2billion in May, the ONS revealed last week. That was nine time the figure for May last year, and the highest since records began in 1993
In an interview with Sky News, Mr Bailey discussed the turmoil in the early stages of the pandemic.
‘We had a lot of volatility in core markets: the core exchange rate, core government bond markets,’ he said.
‘We were seeing things that were pretty unprecedented, certainly in recent times. And we were facing serious disorder.
Pressed on what would have happened if the Bank refused to intervene, Mr Bailey said: ‘I think the prospects would have been very bad. It would have been very serious.
‘I think we would have a situation where in the worst element, the government would have struggled to fund itself in the short run.’
Mr Bailey pointed out that had not happened in living memory. But he rejected accusations of ‘monetary financing’ of the government, saying the Bank acted to preserve stability.
‘At no point have we thought that our job was just to finance whatever debts the government issue,’ he said.
In a separate article for Bloomberg, Mr Bailey set out the shift in approach to unwinding QE.
‘The current scale of central bank reserves mustn’t become a permanent feature,’ he said.
‘As economies recover, it’s likely that some of the exceptional monetary stimulus will need to be withdrawn, including by reducing reserves.’
He added: ‘When the time comes to withdraw monetary stimulus, in my opinion it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis.’
Public sector debt was fractionally below two trillion pounds at the end of last month – equivalent to 100.9 per cent of GDP
The Bank’s balance sheet was already high before the coronavirus pandemic struck earlier this year, forcing it to step in with more help for the flailing economy.
Mr Carney had previously said that he would wait for interest rates to hit 1.5 per cent before starting to reduce assets.
But Mr Bailey said: ‘Elevated balance sheets could limit the room for manoeuvre in future emergencies.’
The governor said Covid-19 had posed the most serious threat to the stability of the financial system since the financial more than a decade ago.
It sparked a nearly unprecedented economic downturn.
Mr Bailey wrote: ‘The response has included a major programme of asset purchases and lending by central banks, with a corresponding growth of balance sheets.
‘This has been the right thing to do to reduce borrowing costs, boost cash flows and more broadly support economies, and it has shown how essential it is to have truly independent central bankers.
‘But the financial system mustn’t become reliant on these extraordinary levels of reserves.’